3 Easy ways to Protect your business from going broke

Build a Cash Reserve

A cash reserve is an emergency fund for your business. This can be used to meet unplanned, short-term financial needs. Once you have a reserve, you don’t need to take out a loan to meet your business expenses. This makes it easy to plan and invest.

Cash on hand or cash in reserve refers to cash or financial assets that you can access immediately. This cash cushion typically includes assets like physical cash you have in your store, and the balance of your business account.

Saving up enough cash to cover expenses for a few months can improve liquidity and make your business more resilient. Your cash reserve account should be separate from your general business bank account and other specific accounts, like a payroll account.

Paying Bills on Time makes running your business easy.

Its easy to fall behind on your financial obligations. This often means you incur late fees. It also forces you to borrow money to cover expenses like payroll. You might also have a hard time with keeping inventory in stock or purchasing raw materials.

As a business owner, you need to be aware that sales can vary. Some industries see a seasonal peak, and a wide range of events can cause sales to slow down for a while.

Most of these factors are difficult to predict and are outside of your control. A natural disaster can disrupt operations, a new competitor can take market shares away from you, and something like an order cancellation or unpaid invoice can slow down your cash flow.

Keeping enough cash on hand to cover expenses over a few months makes it easy to overcome these situations. You should also know that cash on hand will increase your business valuation, which is an advantage if you’re in the process of applying for a loan or looking for investors.

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How Much Cash on Hand Do You Need?

You need to determine how much cash on hand you need to stay afloat if demand slows down. Failing to save up enough cash could make it challenging to meet your financial obligations and increase your risk of bankruptcy.

However, saving more cash than you need would take away from the capital you could use for growth.

Growing your business requires investing in things like research and development, inventory, machinery, or marketing. A large cash cushion means that you will have less capital available for these different investments.

Your cash flow statements are an excellent place to start to assess your monthly expenses. You can use these statements to identify your different expenses, including recurring expenses like payroll, rent, utilities, loan payments, and production costs. It also includes variable expenses like inventory, taxes, and marketing.

If your industry is seasonal, go over your cash flow statements for the past year to identify the months with the most and least expenses.

Experts recommend saving up enough cash to cover between three and six months of expenses. If you operate a seasonal business, make sure you have enough cash to cover expenses during your busiest month.

You can adjust that amount based on your needs and the growth stage of your business.

Constantly review Your Financing Options

it’s wise to know what you want. Are you looking for long-term financing? Do you need cash within days? Do you need the money to refinance debt or buy real estate?

Remember, many types of financing not only have a range of turnaround times from application to payout, but they may also have rules on how the money is spent. Get familiar with each of these most common business funding choices before you start applying.

Obtaining more capital will help you address immediate financial obligations and give you a head start on saving for your cash cushion.

Financing your small business falls into two categories: debt and equity. Financing through debt is a business loan. It happens when a business gets money from a lender to be used as working capital or capital expenses. Loans are secured by assets, this means a lender can take assets away if you don’t repay the loan.

Equity financing is where a business offers a percentage of the company, known as shares, in exchange for money.

Accounting, Book Keeping, Corporate Sustainability

Keeping great business accounts while you are working from home

It can be very difficult to keep good accounts while working from home. Part of the difficulty in working from home is creating a separation—physically if possible and psychologically—from the rest of your home life. This can take as much effort if you live alone as if you have a partner, roommates, or an extended family. How do you distinguish between your personal living costs and your business costs?

We’re in a time of unprecedented uncertainty. In the middle of a global viral outbreak, you were told or asked to work from home—and you’ve never or rarely had to be productive where you live before.

What do you do?

Why you need to keep good accounts

Millions of small business owners are masters at creating great products, building effective teams and winning over customers. However, many business owners fail at basic bookkeeping.

Business entities rely on accurate and reliable bookkeeping for both internal and external users. it not only helps you make solid decisions now and plans for your company down the road, an efficient bookkeeping system saves time. Notably, it prepares you for government audits and helps prevent fraud.

Proper bookkeeping gives companies a reliable measure of their performance. It also provides information to make general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical.

As the business owner, if you don’t understand the different types of accounts required to organize your finances, measuring the success (or failure) of your efforts will be futile.

You can choose to go the DIY route and use software like Quickbooks or Wave. Alternatively, you could use a simple Excel spreadsheet.

Steps to Success

Get a system in place,

The foundation of solid business bookkeeping is effective and accurate expense tracking. Firstly, an accounting system helps organize your financial information. You should be using an accounting system to keep track of expenses, income, and other activities. Basically, this helps you keep an eye on all data that affect the finances of a business organization.

Secondly, an effective accounting system helps you to monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns, and legitimize your filings.

Consequently, allocate a regular time to work on your sales and expenses every day. This period will be used for recording transactions, creating invoices, recording sales and purchases. Additionally, you can issue Credit notes and receipts. This makes your work easier in the long run.

Set up a chart of accounts

The easiest way to record and track your transactions is to set up a chart of accounts:

Create a spreadsheet or use an online service or software package such as Quickbooks.
Allocate separate transactions to their corresponding category of income or expense. Facebook ads are recorded to “Marketing’, your mobile bill to ‘Telecom’ and so on.
Input transactions on a daily or weekly basis.

Separate your business finances from your personal finances

The most important thing you need to start separating business and personal finances is a business bank account. It’s up to you whether to decide to open a business checking or savings account. But we’d recommend starting with a business checking account, since it’s the cornerstone of any company’s financial foundation.

With a dedicated business account, you can pay bills, deposit cash, collect invoice payments, and buy equipment without having to run a cash-only operation, or by having to pull from your personal bank account.

Paying yourself a salary from your business creates a more formal boundary between your business finances and your personal finances. Simply take money from your business bank account and transfer it to your personal checking account once or twice per month, just as if you were working for somebody else. By paying yourself a salary, you establish when and how you will take money out of your business, rather than just pulling from your business finances whenever you need to.

Make security a priority in your book-keeping. The fewer people that have access to your accounts, the better

Accounting, Financial management

Getting your accounting done properly

Accounting involves counting, but it is not just counting. When you look deeply enough, accounting is a set of agreed-upon rules to produce the evolving financial story of an organization.

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The definitions of accounting are typically very dry and, in my opinion, often don’t provide a rich illustration of the purpose of accounting.

Accounting produces a lot of numbers that put a financial value on something. For instance, if steel is an input for your product, it tracks what you buy and how much it cost. It also tracks the value of the product from the factory floor until it is sold to the final consumer.

Why do we need accounting?

We should keep in mind why we do accounting in the first place. Anytime someone wants to be informed about something that involves quantitative or monetary things, they’re probably going to look at some type of an account or financial report.

Shareholders use them, executive compensation decisions are based on them, internal resources allocation use them. If we could measure value, we could answer the following questions exactly:

What is producing value in this organization?

What kinds of activities produce value?

How do we distinguish activities that produce value from things that are consuming more than they’re producing?

Writing the accounting story involves “judgment calls” that can be made fairly and ethically, or unfairly and unethically.

There are famous examples of organizations that have just blown up because their accounting processes lost integrity. Jeff Skilling joked about “hypothetical future value” accounting, where basically you just make up whatever numbers you want and put them in. And it was too close to what Enron actually did.

In our opinion, it is insane to damage the perceived integrity of the process.

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So What should you do?

In our opinion, every business owner and manager needs to understand accounting basics. These concepts including assets, liabilities, equities, revenues, expenses, gains and losses. Furthermore, they need to understand how those concepts go into producing financial statements and bottom-line statistics.

Consequently, if you want to fundamentally change your organization’s way of doing things, you need to understand why things are the way they are.

It’s like any infrastructure: when things are going well, people don’t necessarily have to appreciate or understand all the foundations of it. But, when you need to adapt to a big shock, you need to understand how things work at a pretty fundamental level.

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Accounting, Book Keeping, Corporate Sustainability, Financial management

By UBRbizreg
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May 11, 2020

Debt to Equity Ratio

What Is the Debt-To-Equity Ratio – D/E?

The Debt to Equity ratio is an important metric used in corporate finance. It is a measure of the degree to which a company is financing its operations through debt versus wholly-owned funds.

The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. These numbers are available on the balance sheet of a company’s financial statements.

The ratio is used to evaluate a company’s financial leverage. More specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.

Leverage refers to the amount of debt incurred for the purpose of investing and obtaining a higher return.

D/E Ratio Formula and Calculation

The information needed for the D/E ratio is on a company’s balance sheet.

Given that the debt-to-equity ratio measures a company’s debt relative to the value of its net assets, it is most often used to gauge the extent to which a company is taking on debt as a means of leveraging its assets. A high ratio is often associated with high risk; it means that a company has been aggressive in financing its growth with debt.

If a lot of debt is used to finance growth, a company could potentially generate more earnings than it would have without that financing.

If leverage increases earnings by a greater amount than the debt’s cost (interest), then shareholders should expect to benefit. However, if the cost of debt financing outweighs the increased income generated, share values may decline.

Analysts are not always consistent about what is defined as debt. For example, preferred stock is sometimes considered equity, but the preferred dividend, par value, and liquidation rights make this kind of equity look a lot more like debt.

Including preferred stock in total debt will increase the D/E ratio and make a company look riskier. Including preferred stock in the equity portion of the D/E ratio will increase the denominator and lower the ratio.

Limitations of the D/E Ratio

it is very important to consider the industry within which the company exists. Because different industries have different capital needs and growth rates, a relatively high D/E ratio may be common in one industry, meanwhile, a relatively low D/E may be common in another.

For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while tech or services firms could have a typical debt/equity ratio under 0.5.

Utility stocks often have a very high D/E ratio compared to market averages. A utility grows slowly but is usually able to maintain a steady income stream, which allows these companies to borrow very cheaply.

High leverage ratios in slow growth industries with stable income represent an efficient use of capital. The consumer staples or consumer non-cyclical sector tends to also have a high debt to equity ratio because these companies can borrow cheaply and have a relatively stable income.

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Accounting

By UBRbizreg
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May 7, 2020

Understanding Financial Statements

A company’s financial statements are a window into its financial health. No wonder studying them is an integral part of fundamental analysis.

The balance sheet, profit-and-loss statement, as well as the cash-flow statement contain the data necessary to guide investors looking to invest in a company.

Ratios used in analysing stocks are impossible to obtain without figures and data contained in these statements.

While analysts dig into financial statements and try to unearth the not-so-obvious aspects of a company’s financials, understanding basic financial statements should suffice for an investor in most cases.

An Explanation of the Major Financial Statements

There are three major financial statements: the balance sheet, profit-and-loss statement and cash-flow statement.

The balance sheet tells you about the assets and liabilities of a company. The profit-and-loss statement tells you about a company’s profitability. And the cash-flow statement is about the flow of cash into and out of a company.

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Balance sheet

The balance sheet shows the assets that a business owns, the liabilities that it owes and the funds contributed by its shareholders.

The balance sheet is so called because it always balances according to this equation:

Assets = Liabilities + Owners’ equity.

A balance sheet that doesn’t balance is simply wrong.

Assets include land, equipment, inventory, goodwill, patents, brand value, etc. Liabilities include debt (long-term and short-term) and any other payables that a business has. Shareholder funds are in the form of equity and reserves.

Strong v Weak Balance Sheets

A weak balance sheet is one that is saddled with debt. When a business has a strong balance sheet, it has more assets and equity than liabilities.

In order to know the balance-sheet strength, you need not actually see the balance sheet; you can just look at the debt-equity ratio.

Profit-and-loss statement

As its name suggests, the P&L statement tells you about the profitability of a company. The simple formula to calculate profits is

Profit (loss) = Revenue – Expenses.

The head revenue generally has two entries: revenue from sales and other income.

Other income is the revenue from sources other than the core area of the company’s operations. For instance, it could be income from investments, dividends, royalties, etc.

The head expenses constitutes the categories of expenditure such as cost of raw materials, employee costs, etc. On subtracting the total costs from the total revenues, we get the operating profit, which is nothing but a company’s profit from its core operations.

In order to arrive at the final profit figure, any miscellaneous income or loss is to be added to or subtracted from the operating profit. Finally, net profit is obtained after deducting the tax applicable.

Cash-flow statement

A cash-flow statement provides a true picture of a company’s financial health. While businesses can misstate their profits through creative accounting, they can’t fake the movement of hard cash.

The cash-flow statement shows the movement of cash in a business. The cash-flow statement is of limited use for banks and finance companies, but it is important for investors.

How to read a Cash Flow Statement

The cash-flow statement has three components: cash flows from operating activities, from financing activities and from investing activities. The statement also mentions the current cash holding of the business.

What you need to check in the data is whether flows from operating activities are positive or not. If they are positive, it means that the company is able to generate cash from its operations. If they are negative, it means that the company is losing money. While it may show profits in its P&L statement, negative flows from operations should ring an alarm.

Cash flows from financing activities show the money raised for the company’s operations or the money paid towards debt repayment. The former will be a positive number on the statement, while the latter will be a negative number.

Cash flows from investing activities capture the cash used in investments. For instance, a business that has generated surplus cash may park it in a bank fixed deposit. Next year it may withdraw cash from that Fixed Deposit. The former will be a negative number on the statement, while the latter will be a positive number.

All these statements may be found in the annual reports of companies as well as online. A simple web search should unearth the information.

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Accounting, Book Keeping, Corporate Sustainability

By UBRbizreg
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May 4, 2020

Why is it good to separate your personal and business finances?

As a business owner, it is crucial to remember that your company is an independent entity. Your business is more than a hobby, therefore it has to stand free from you and your personal finances. Separating your finances shows that you are serious about your business in the long run.

Unfortunately, many entrepreneurs run both their personal and business-related transactions through the same bank account, which is typically an individual savings account.

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Advantages of keeping your accounts separate

It looks good

The importance of separating your personal and business finances also comes down to your professional image. Having two separate accounts rather than using the same for both business and private purposes makes you look more serious, including helping to establish your business identity.

It makes it easier to secure funding

The ability to obtain working capital for your business is vital to grow it, and business credit will be mandatory to secure larger business loans. Having your personal and business income blended together makes it more difficult to provide your business income to banks and credit ratings agencies, therefore making it more difficult to establish your business credit.

It helps you take advantage of tax deductions

The ability to take advantage of tax deductions, including writing off business expenses, is a huge reason many business owners choose to split their personal and business finances.

Of course, there is no way you are not going to take out money from your business to meet personal needs, after all that is why you’re in business in the first place. But you need to put a structure around it so that it is not done indiscriminately.

Cultivating financial discipline is critical to your success as an entrepreneur. It is pointless maintaining a corporate bank account for your business if you are still going to dip into it from time to time to meet your personal needs.

Keeping accurate records of personal and business expenses is vital when running a business, as this will not only help save time but a significant amount of stress as well.