Tag: accounting

Is Your Business Healthy? Let the Numbers Tell the Story

Over the past few weeks, we’ve discussed how to create and understand your financial statements. Now it’s time to turn our attention to reviewing and assessing those statements.

Regularly analyzing your financial data is essential to:

  • Determine if your business plans are working
  • Identify problems such as theft or fraud
  • Evaluate how your business compares to others in your industry
  • Spot trends that may positively or negatively affect your revenue

Are Your Plans Working?

Your cash flow worksheet was based on projected monthly sales over two years. You made critical business decisions—such as hiring staff, leasing space, and applying for financing—based on those projections.

If your actual revenue is falling short of projections, you may be burning through cash faster than expected. Identifying that early allows you to make adjustments, cut expenses, or secure additional funding.

On the flip side, if your revenue is exceeding expectations, you might be struggling to meet demand or maintain excellent customer service. In that case, you may need to hire more staff or set clearer expectations with customers regarding delivery times.

Identifying Problems

When I owned a restaurant, we were required to complete a weekly profit and loss statement and submit it to headquarters along with our royalty payment. Two numbers I always paid close attention to were payroll and cost of goods sold (COGS).

Our goal was to keep payroll under 22% of revenue and COGS under 35%. If either number was too high, it triggered an investigation. Here are some examples:

Payroll Red Flags

  • Overstaffing during slow periods: I reviewed scheduling during off-peak hours and made necessary adjustments.
  • Employees clocking in early or out late: I compared timecards to the schedule. One student used to come in early to do homework, but I didn’t realize he was on the clock!
  • Overtime pay: This often happened when a nearly full-time employee picked up extra shifts. We learned to ask part-time staff to cover instead.

Inventory Red Flags

  • Improper food preparation: Mistakes led to waste. We retrained employees or reminded them to follow special instructions more carefully.
  • Excess food on the buffet: Supervisors learned to reduce what was put out in the last 30 minutes of service.
  • Ordering errors: Overstocked perishables spoiled; running out meant buying from local stores at higher prices.
  • Theft: This included employees eating food without paying, giving away food, or failing to ring up sales and pocketing the cash.

Even if you’re not in the food service business, these examples illustrate how to track down the causes of higher-than-expected costs.

Comparing to Industry Standards

Analyzing your financial statements also helps you understand how your business stacks up against others in your industry. Industry benchmarks are available through association data, IBISWorld reports, and other sources.

For more on this, check out my blog: Comparing Your Financial Ratios to Industry Standards – Susan’s Reflections

Spotting Financial Trends That Spell Trouble

Declining sales volume is a major red flag. A brief dip might be seasonal or due to temporary competition. But if the trend continues, take a closer look:

  • Customer service issues: Even one rude or careless employee can cost you business. Many customers won’t complain—they’ll just leave.
  • Product quality issues: Poor-quality goods can lead to returns and dissatisfied customers.
  • Missed deadlines: Late deliveries frustrate clients. Evaluate every step in your supply chain to find and fix delays.

Rising accounts receivable can signal that your customers are struggling to pay. This slows your collections, reduces cash flow, and makes it harder to pay your own suppliers. If your receivables are growing:

  • Identify which customers are paying late and ask why.
  • Consider adjusting their credit limits or payment terms.
  • Project your cash flow for the next few months.
  • Talk to your banker about a line of credit, and ask suppliers for more favorable terms if needed.

Declining profit margins are another warning sign. Investigate the root cause. It could be:

  • Rising supply costs: Due to inflation, fuel prices, or shortages. Consider discontinuing low-margin items or sourcing more affordable alternatives.
  • Increased wages: If labor costs have risen, look for ways to improve productivity or automate processes.
  • Higher operating expenses: These might include utilities, insurance, or telecom services. Shop around for better rates, reduce waste (like leaking pipes or lights left on), and review whether you’re paying for services you don’t need.

Final Thoughts

Every business is different, but all must control costs and protect profit margins. Assessing your financial ratios regularly helps you identify problems early—before they impact your bottom line. Use the examples above as a guide to evaluate your own financials, make informed decisions, and position your business for long-term success.

If you’d like help reviewing your financial statements or identifying potential issues, don’t hesitate to reach out. I’m here to support you! You can email me at susan.ball5@aol.com.

Know Your Financial Statements—Accounts Payable

Most small businesses have a number of unpaid bills at any given time. Inventory has been delivered, but the invoice isn’t due yet. Utility bills arrive two to three weeks before the due date. Retail sales tax has been collected but not remitted to the tax department. Payroll withholding taxes are being held in escrow until it’s time to file quarterly reports. These unpaid bills are known as accounts payable.

It’s crucial to keep track of your accounts payable so you know how much is owed, to whom, and when the bills are due. Managing your accounts payable effectively offers several benefits. A statement of accounts payable will help you achieve this.

Benefits of a Statement of Accounts Payable

  1. Effective Cash Flow Management
    Accounts payable should be included in your cash flow statement for the month they are due. This ensures that you’ll have enough cash on hand to cover those bills. It also helps highlight months where a shortage might occur, allowing you to arrange a line of credit to meet forecasted shortfalls.
  2. Avoidance of Late Fees and Interest
    Tax authorities impose penalties for late filing of quarterly tax payments and monthly sales tax reports. Banks, utility companies, and suppliers may also charge late fees or interest for bills that aren’t paid on time.
  3. Take Advantage of Discounts
    Many suppliers offer discounts for early payment. A statement of accounts payable lets you easily spot vendors offering discounts, so you can ensure bills are paid on time to take advantage of these savings.
  4. Maintain Good Credit and Vendor Relationships
    Timely payments are key to maintaining a strong credit score and healthy relationships with lenders and suppliers.
  5. Preparation for Loan Requests
    If you need to borrow money or establish a line of credit, lenders will often request a statement of accounts payable. This statement helps them evaluate your level of debt in relation to industry norms and your ability to cover outstanding debts if your revenue declines.

Creating a Statement of Accounts Payable

A statement of accounts payable is essentially a table that includes:

  • Name of creditor
  • Account number or invoice number
  • Invoice date
  • Due date
  • Amount owed
CreditorAcct/Invoice NumberInvoice DateDue DateAmount
Bill 1    
Bill 2    
Bill 3    
Bill 4    

Tips for Managing Accounts Payable

Managing accounts payable effectively is crucial for maintaining healthy cash flow and good vendor relationships. Here are some best practices to consider:

  • Separate Regular and Occasional Bills
    Keep distinct charts for bills that occur regularly and those that are occasional. This makes it easier to track and manage.
  • Record Monthly Bills on Your Cash Flow Statement
    Include occasional bills in the months they are due, not just the regular ones. This will help you get a clear picture of your upcoming cash flow needs.
  • Set Up Automatic Payments for Fixed Monthly Bills
    Set up automatic payments for bills like rent, loan payments, cell phone bills, and subscriptions that are predictable and have a fixed amount.
  • Estimate and Adjust for Variable Bills
    For bills that vary, like utilities or discretionary expenses (marketing, for example), use an estimated amount in your cash flow statement and adjust for seasonal variations.
  • Automate Bill Payments When Possible
    If possible, have bills go directly to your bank. This simplifies the payment process, especially if you’re using a bill-paying app.
  • Track Infrequent Bills
    For less frequent bills, like insurance payments, set up automatic payments to ensure you don’t overlook them.
  • Balance Your Checkbook Regularly
    Schedule weekly or bi-monthly checkups to balance your checkbook and confirm that all bills have been paid or are scheduled for timely payment.
  • Forecast Cash Flow in Advance
    Predict your monthly cash balances several months in advance to determine if sufficient funds will be available during slower months. If you forecast a shortage, take steps to ensure enough cash is available, like establishing a line of credit or injecting more capital into the business.

Conclusion

A statement of accounts payable is a simple but powerful tool for tracking your bills and maintaining healthy cash flow. By following the tips above, you’ll be able to manage your accounts payable effectively, avoid late fees, and maintain good credit and vendor relationships.

If you have any questions about managing your accounts payable or tips for creating your own statement, feel free to drop them in the comments below. I’d love to help you better understand this important aspect of your business finances!

Know Your Financial Statements—Accounts Receivable

If your business extends credit to customers, understanding and managing accounts receivable is essential. Accounts Receivable (AR) refers to the money customers owe for services rendered or goods delivered, and it’s a critical part of your cash flow. Many businesses—like professional services, utility companies, and wholesalers—work with accounts receivable.

What Are Accounts Receivable?

When you extend credit, you’re essentially allowing your customers to pay later, often within a specified number of days. For example, if you deliver goods or services to a customer, you may allow them 30 days to pay the bill. In this case, you would have an account receivable until that payment is made.

To effectively track AR, businesses use an aging schedule, which categorizes accounts based on how long the payment is overdue. At the end of this blog, I’ve provided a helpful Accounts Receivable Aging Schedule Template. This template outlines what to include in your report, but if you prefer to create your own, it offers a great starting point to ensure you’re tracking the necessary information. Typical categories are:

  • Current (not yet due)
  • 1-30 days past due
  • 31-60 days past due
  • 61-90 days past due
  • Over 90 days past due

Why Does This Matter?

An Accounts Receivable Aging Report plays a significant role when you apply for a business loan. Lenders will review this report to assess how much of your business’s sales are made on credit, how it compares to industry norms, and whether there’s a risk of non-collection. Specifically, lenders are concerned about the percentage of receivables that are more than 60 days overdue. If the report shows high delinquency, it could signal poor cash flow management, which might lead to a loan denial.

Why Managing Accounts Receivable is Crucial

Effective AR management is key to your business’s cash flow health. Here are a few strategies to keep in mind:

  • Measure the Effectiveness of Discounts
    Many businesses offer early payment discounts, like “2/10 Net 30,” meaning a customer gets a 2% discount if they pay within 10 days, but the full amount is due in 30 days. If a lot of customers are taking advantage of the discount, cash comes in quicker—but your profit margin takes a hit. Understanding how well your discount terms are working can help balance cash flow with profitability.
  • Monitor Customer Behavior
    Let’s say you’ve had a loyal customer who consistently pays early for the discount, but now they’re paying late or just on time. This could be a sign that they’re experiencing cash flow problems. If so, it’s worth reaching out to see how you can help. Perhaps they need smaller orders, or you can work out a payment plan to keep the relationship strong and reduce your risk of uncollected debt.
  • Improve Cash Flow Management
    By closely tracking overdue invoices, you can promptly follow up with reminders. If certain customers consistently pay late, it might be necessary to put a hold on further orders until they clear their outstanding balance. Proactively managing receivables ensures that cash keeps flowing into your business and reduces the risk of uncollected debt.
  • Assess and Adjust Credit Terms
    If few customers are taking advantage of your early payment discount, it could be time to reassess your credit policy. Maybe your discount isn’t big enough to incentivize early payment. Or perhaps customers need more time to pay based on how quickly they can sell your product. Adjusting your credit terms might help accelerate cash flow without compromising customer relationships.

The Risk and Reward of Extending Credit

Offering credit is an excellent way to attract new customers and keep current ones loyal. A discount for early payment can boost cash flow and reduce the risk of bad debt. But, as with all things in business, extending credit comes with its risks—delayed payments can affect cash flow, and offering discounts reduces profit margins. It’s important to stay informed about industry standards, track your AR regularly, and adjust your policies as needed. Most accounting software has monitoring features that can make this process easier.

Here’s a template for an Accounts Receivable Aging Schedule:

Final Thoughts

Tracking accounts receivable is more than just a financial task—it’s a critical element in your business’s cash flow management. By understanding how to monitor, manage, and adjust credit policies, you can strengthen your business’s financial health and make sure cash continues to flow in the right direction.

Know Your Financial Statements—The Income Statement

As a business owner, understanding your financial statements is key to making informed decisions. In this post, we’re diving into the income statement—a crucial report that shows how well your business is performing over a specific period of time, whether it’s a month, a quarter, or a year. Simply put, the income statement tells you how much revenue you’ve earned, how much you’ve spent, and—ultimately—whether you’re turning a profit.

Revenue: The Starting Point

The income statement starts with revenue, also known as sales or income. This represents the money your business earns before any expenses are subtracted. For most businesses, revenue can be broken down into different categories, depending on the nature of the business.

Common sources of revenue include:

  • Sales (products or services)
  • Fees and commissions
  • Rental income and interest income
  • For nonprofits, revenue also includes donations

You might also break down your revenue into specific categories to gain deeper insights into how your business is performing in different areas. Here are a few examples of how businesses typically organize revenue:

  • In-store vs. online sales
  • Food vs. beverage sales (for restaurants)
  • Restaurant sales vs. catering sales
  • Sales by department (women’s, men’s, and children’s clothing)
  • Sales by location (if you have multiple stores)

Cost of Goods Sold (COGS): Direct Costs Tied to Sales

Next, we have the Cost of Goods Sold (COGS), which represents the direct costs associated with producing or acquiring the goods you sell. COGS is often separated from operating expenses because it directly impacts your revenue.

The formula for COGS is:

COGS = Beginning Inventory + Purchases – Ending Inventory

For manufacturers, this cost also includes direct labor (the wages paid to employees who produce the product) and the raw materials used to create the product.

Keep in mind, determining your COGS accurately requires precise inventory management. Regular inventory counts—whether manual or tracked through software—are essential. Also, fluctuations in purchase prices can affect your COGS, especially if inventory items were bought at different prices.

Operating Expenses: The Cost of Running Your Business

Now, let’s talk about operating expenses—the costs involved in running your business day-to-day. These expenses can be fixed or variable:

  • Fixed expenses stay the same every month, such as rent, salaries, insurance, and depreciation.
  • Variable expenses change from month to month, such as wages (if you’re paying hourly employees), utilities, credit card fees, and supplies.

Some expenses can fall into both categories. Take advertising for example: while contracted services like digital ads might be a fixed cost, other components—like ad spend or promotional events—could fluctuate based on your business decisions.

Other Expenses: Beyond Operations

In addition to operating expenses, businesses also incur other expenses that are not tied directly to day-to-day operations. These are typically separated on the income statement.

Here are a few examples of “other” expenses:

  • Loan payments: The principal portion of a loan repayment isn’t deductible, but the interest portion is. Only the interest is accounted for here.
  • Capital expenditures (CapEx): While expenses related to property and equipment are legitimate business costs, they aren’t shown directly on the income statement. Instead, these are capitalized on the balance sheet and then depreciated over time.
  • Taxes: These include property taxes, sales taxes, and income taxes, and are generally listed separately from operating expenses.

The Bottom Line: Profit

After all expenses have been deducted, what’s left is your net profit (or loss). This is the amount that ultimately accrues to the owner(s)—and what determines if your business is financially healthy.

Final Thoughts

The income statement isn’t just a tool for accountants; it’s an essential document for any business owner. Understanding each section allows you to make smarter decisions about pricing, expenses, and growth. By regularly reviewing your income statement, you’ll have a clear picture of where your business stands and what adjustments might be necessary to hit your goals.

Here’s a template to show you what an income statement looks like:

Company Name
2025
Revenue
  Less:  Cost of Goods Sold 
Gross Profit $             –  
Expenses:
  Administrative Expenses
  Advertising and marketing
  Credit card fees
  Depreciation
  Insurance
  Interest expense
  Licensing and registration
  Professional Services
  Professional Memberships
  Office Expense
  Owner’s Draw
  Rent
  Supplies
  Telephone & Utilities
  Travel Expenses
  Wages
Total Expenses $             –  
Net Profit (Loss) $             –  

If you’d like a changeable balance sheet template, feel free to email me at susan.ball5@aol.com, and I’ll send it your way!

Know Your Financial Statements: Understanding the Balance Sheet

Many small business owners find financial statements intimidating, but they don’t have to be. Understanding your financial statements is key to managing your business’s health and growth. In this blog post, we’ll break down the balance sheet—one of the most essential financial statements you need to know.

By the end, you’ll have a clearer understanding of how your business’s assets, liabilities, and equity come together to tell the story of your company’s financial health.

What Is a Balance Sheet?

A balance sheet provides a snapshot of your business’s financial position at a specific point in time. It outlines three core components:

  • Assets: What your business owns
  • Liabilities: What your business owes
  • Equity: The owner’s stake in the business

The fundamental equation behind a balance sheet is:

Assets = Liabilities + Equity

This equation shows that all assets are financed either by the owner’s investment, debt (liabilities), or retained earnings (profits that remain in the business).

Assets: What Your Business Owns

Assets are the resources your business owns or is owed. They can be divided into two main categories: Current Assets and Fixed Assets.

Current Assets

These are assets that can be converted into cash or used within one year. They include:

  • Cash: Money in bank accounts and on-hand
  • Accounts Receivable: Money owed to the business, typically due within a year (e.g., unpaid customer invoices, credit card balances)
  • Inventory: Goods held for sale or used in production

Inventory Valuation Tip: Inventory can fluctuate in value over time. A common method is the FIFO (First In, First Out) method, where older inventory is sold first. This helps ensure the most recent purchases are valued accurately.

Fixed Assets

Fixed assets are long-term investments that have a stable value and are expected to last for more than one year. These include:

  • Furniture, fixtures, and equipment
  • Property and real estate
  • Vehicles

Depreciation: Fixed assets lose value over time due to wear and tear. Your accountant will help determine the most beneficial depreciation method for your business, as set by the IRS.

Liabilities: What Your Business Owes

Liabilities represent debts your business is obligated to pay. These are also categorized into two types: Current Liabilities and Long-Term Liabilities.

Current Liabilities

These are debts that need to be paid off within a year, including:

  • Accounts Payable: Money owed to suppliers for purchases made on credit
  • Accrued Expenses: Unpaid expenses like utilities and payroll
  • Short-Term Loans: Loans due within the next 12 months
  • Taxes Payable: Unpaid taxes, such as sales tax or payroll taxes

Long-Term Liabilities

These are debts that won’t be paid off within the next year, including:

  • Bank loans
  • Mortgages

Equity: The Owner’s Investment and Retained Earnings

Equity represents the value of the owner’s investment in the business. It shows how much of the company’s assets belong to the owner after liabilities are subtracted.

Owner Investment vs. Retained Earnings

  • Owner Investment: Money the owner invests to fund the business’s start-up or operations (also known as Owner’s Injection).
  • Retained Earnings: Profits that are kept in the business rather than taken out by the owner for personal use. These earnings are used to fuel growth and expansion.

If your business is incorporated, the value of the owner’s investment is shown through stock shares issued to the owner. For sole proprietors or LLCs, the investment is recorded directly as part of the business’s equity.

How to Create a Balance Sheet for Your Business

To create your own balance sheet, start by listing all your assets and liabilities. Here’s a simple balance sheet template you can use:

Balance Sheet 
Company Name 
  
 2025
Assets: 
  Cash 
  Account Receivable 
  Furnishing 
  Equipment 
 Net Fixed Assets 
Total Assets $                 –  
  
Liabilities and Equity: 
  Accounts Payable 
  Notes Payable 
  Long-term Debt 
Total Liabilities                    –  
  Owner’s Injection 
  Retained Earnings 
Total Equity                    –  
  
Total Liabilities + Equity  $                 –  

If you’d like a changeable balance sheet template, feel free to email me at susan.ball5@aol.com, and I’ll send it your way!

Final Thoughts: Why the Balance Sheet Matters for Your Small Business

Your balance sheet is more than just a snapshot of your business at a specific point in time. It’s a valuable tool that helps you:

  • Understand the financial health of your business
  • Track your growth and plan for future investments
  • Make informed decisions about spending, borrowing, and retaining earnings

By regularly reviewing your balance sheet, you’ll be better equipped to manage your finances and maximize your profits. Have questions about your business’s balance sheet? Or need help understanding your financial statements better? Drop your questions in the comments below, and I’ll get back to you as soon as possible.