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Business Finance 101 – Accounting Standards / Principles (GAAP) – why is it important to have?

Business Finance 101 – Accounting Standards / Principles (GAAP) – why is it important to have?

Accounting Standards / Principles (GAAP) – why is it important to have?

When we do accounting (which is recording the monetary values of financial transactions) there are general rules and concepts that have been developed over many decades that apply. These are called basic accounting standards / principles or guidelines and are the groundwork on which more detailed, complicated, and legalistic accounting rules are based.

In Australia. The Australian Accounting Standards Board (AASB) uses the basic accounting principles and guidelines as a basis for their own detailed and comprehensive set of accounting rules and standards.

There is a phrase “generally accepted accounting principles” (or “GAAP“) which consist of three important sets of rules: (1) basic accounting principles and guidelines, (2) detailed rules and standards issued by AASB, and (3) the generally accepted industry practices.

When a company distributes its financial statements to the owners or the public, it is required to follow generally accepted accounting principles in the preparation of those statements. Further, if a company’s shares are publicly traded, federal law requires the company’s financial statements be audited by independent public accountants. Both the company’s management and the independent accountants must certify that the financial statements and the related notes to the financial statements have been prepared in accordance with GAAP.

GAAP is useful because it attempts to standardise and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles we are able to assume that there is consistency from year to year in the methods used to prepare a company’s financial statements. And although variations may exist, we can make reasonably confident conclusions when comparing one company to another, or comparing one company’s financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.

The Accounting Standards (GAAP) are split into various categories eg “Statement of Cashflows”, “Construction Contracts” etc and a list with most recent updates/ pronouncements for Australia can be found HERE.

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much! Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia

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Cash flow Tips – How a focus on Key KPI can impact growth – how we help our clients

Cash flow Tips – How a focus on Key KPI can impact growth – how we help our clients

Cash flow Tips – How a focus on Key KPI can impact growth – how we help our clients

Account Keeping Plus has seen real-life examples of results when you focus on Key Performance Indicators (KPIs) to impact your business growth, but coming up with which KPI numbers can seem difficult.

In fact it’s as simple as this: start with a pool of numbers that seem as though they could be important to your overall success, then rule them out one by one until the pool is small enough to count on one hand. Those are your KPIs, or critical numbers.

Here are some ways to generate a pool of possible KPI or “right numbers”:

  • Start with your top-level financial goals and targets such as the specific numbers that define success for your company.
  • Look at the things going on in your market and industry. What are the trends for the last few years? What are your customers and employees saying?
  • Look at your financial statements. Often times, the “right numbers” will include sales, gross profit and net profit from the income statement. Balance sheet numbers might include level of cash, accounts receivable, debt and equity. You may also calculate various ratios such as gross margin percent and current ratio.
  • List all the vital areas of focus – customer service, marketing, sales, products and services, production and quality – then drill deeper into each of them. These may be your various departments or they may be workflow functions independent of the department.
  • Don’t focus only on just financial measures. Operational numbers (i.e. web hits, turnaround time, customer satisfaction, etc.) can be especially helpful in analysing the progress toward your most important goals and growth.
  • Ask yourself these two questions: What numbers do you and your people currently monitor on a regular basis? How did you choose those numbers?

Now that you have a BUNCH of numbers, start the elimination game, as here is my final piece of advice for determining the metrics you’re going to track:

  • Keep the amount of information to a handful of KPI critical numbers so your attention isn’t spread. Just because you CAN measure something doesn’t mean you SHOULD. Sometimes, Less is more. Consider also having key managers taking on some of the KPIs that relate to their area – finance, production, operations, sales, marketing, etc.

Once you’ve narrowed down your KPIs, ask yourself and the team one more question: Are we monitoring the right numbers? Usually time will tell – it sorts out over a period – you’re not going to know your essential and critical numbers right away, and other times you’re spot on.

Finally, it is critical to create a system to organize your numbers. For this, consider starting a dashboard for all to see.

One client of ours, instead of showing the $, prefers to show Quotes and Invoices as Hours, with minimum targets monthly for each. So once we have checked all the accounts receivable is reconciled to deposits in his Xero, we run reports on the previous month total Quotes and total Invoiced. In excel I have created a template to enter this raw data, which is automatically converted to a number called hours (which is derived after financial review of the required $ per hour minimum to cover the business costs and wages and super currently).

I then post the numbers – above or below the Min. target on a white board in the office so all can see.

When targets are met they celebrate, when they aren’t they try to work out what has changed or been missed, and make changes to stop the retreat. And it’s engaging all staff, and creating a team effort! The KPIs are WORKING!

They are part of the AKplus service he receives from us, which includes a Business Health Review of other KPIs – Sales, Gross & Net Profit, Current Ratio. See Services in the Menu, and call to ask us to send a FREE sample of how we help businesses understand the numbers, and GROW!

Need help? Not sure? Call for FREE 30min advice / strategy session today!

Call 0407 361 596 Aust


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Cashflow Tips – Managing Cashflow in a small business – Key areas to watch

Cashflow Tips - Managing Cashflow in a small business – Key areas to watch

Cashflow Tips – Managing Cashflow in a small business – Key areas to watch

When you manage to make a profit in your business, part of good business finance 101 (Ground level) means now you have to follow it up with good cash flow management and the key areas to watch are given here. This requires a good understanding and keeping a close eye on what drives the cash flow – both coming in AND going out!

The key areas of good cash flow management to watch are:

  • Profitable income and increasing
  • Pricing for profit – if you’re able to increase prices, do It!
  • Timely collection from customers – don’t be a bank for them
  • Stock management – enough to sell but not too much to waste working capital
  • Good job management – finishing timely and with the best quality possible
  • Continual management and minimisation of costs and business overheads
  • Utilising all credit terms from suppliers and increasing where possible

The very best way to handle cash flow management is to have a ‘Cash Flow Projection. This is software or a spread-sheet that plots out what your expected income will be (WHEN paid, ie taking into consideration the time customers are likely to take to pay) and what the expected outgoings (actually paid) will be. As well as income it includes any other funds coming into the business, such as asset sales, tax refunds etc. Outgoings will include items such as loan repayments, tax, dividends etc. These are just as important to take into account, as their timing can have a big impact on cash flow.

What are your thoughts? Call for FREE 30min advice / strategy session today!

0407 361 596 Aust

Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


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Cashflow Tips – Lease or buy business vehicle and equipment?

Cashflow Tips – Lease or buy business vehicle and equipment?

Cashflow Tips – Lease or buy business vehicle and equipment?

In an interesting discussion about mistakes in business, the topic became whether to lease or buy a business vehicle or stock/equipment.

The example one business gave, was to buy outright for equipment that would have signs on it to advertise another business (he organised advertising for businesses). The issue was – spending $10,000 on the equipment took all the spare money the business owner had, while the payment for the advert was monthly over a multi-year contract.

Hindsight showed that it would have been better to get a loan for the equipment,  then add his mark-up for the advert and service on top of the monthly re-payments, and he would still have his $10,000 to use for cashflow and marketing.

“What is your tip? Consider posting a review or comment for us below!”

Need help? Not sure? Call for FREE 30min advice / Strategy session today!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


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Business Finance 101 – What are the key financial ratios that help you understand your business financial health

Business Finance 101 – What are the key financial ratios that help you understand your business financial health

What are the key financial ratios that help you understand your business financial health

With several months of transactions recorded and bank and credit cards and loans reconciled, an important business finance task each month is use the hidden value in your bookkeeping to get key financial ratios to track how the business is going, to understand your business financial health.

To save time, use the reporting features to generate some key margins and ratios. These are like a report card for your business. The most common to monitor are –

  • Gross profit,
  • Net profit,
  • Current ratio,
  • Quick ratio and
  • Debt to equity ratio.

Use the Profit & Loss statementTip – in MYOB choose with YTD (year to date), or in Reckon/Quickbooks, modify to include the YTD. This will automatically give you a percent column that is the amount of Gross Profit or Net Profit as a percent of the total sales at the top. See our Business Profit and Loss Statement and Profit Margins post for more detail to understand more and how to calculate manually.

Then compare to your peers – Do you know what your industry Gross Margin % is?

Call us and we can give you a guide for FREE!

Use the Balance Sheet to look at the next ratios, which give an indication of the health of your business –

Current Ratio = Total Current Assets / Total Current Liabilities

This confirms whether the business has enough current assets to meet payment of its current debts (current refers to assets and liabilities that will fall due within 12 months). It includes inventory value, as this will be turned over in less than 12 months.

Quick Ratio (Acid Test) = Cash + Receivables/Debtors / Total Current Liabilities

This is like current assets without inventory which can take time to sell if a fire sale is needed, and is mostly the liquid assets. The higher the amount the more “Stable” the business is. That is, the higher it is, the longer the company can stay afloat.

Debt to Equity = Debt/Equity

Divide the amount of debt usually total liabilities) by the equity (owner’s or shareholder’s). the lower the better, but some debt can help you grow and is called leverage – debt can be beneficial, but it must be manageable – higher than 1 can be a warning to keep a close eye and manage the debt carefully. See more

The key is to see that huge value lies in your bookkeeping records! The books are and asset not a liability or expense – they are an invaluable source, so use your bookkeeping to get key financial ratios to track how the business is going.

Need help? Not sure? Call for FREE 30min advice / strategy session today!

Call 0407 361 596 Aust and also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


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Cash flow Tips – How we achieved steady cash flow for our client

Cash flow Tips – How we achieved steady cash flow for our client

Cash flow Tips – How we achieved steady cash flow for our client

One client was struggling – feast and famine with money coming in then drying up and bills to pay!! He couldn’t achieve steady cashflow because he was pulled with all the many tasks a growing business owner must juggle! WE have found a system that improves getting paid and is more consistent than the old traditional monthly statement and phone call method of traditional business practice.

How he was going under

One week he could get on top of who owed him what, and what he owed, then he was out of touch again within a week with calls, quotes, staff issues, client issues and so on. He’d stay up after the children and wife were in bed and it was quiet, to concentrate and get back on track – but it was making him more tired and he was being drained.

How he bit the bullet and solved the problem

  • He decided to call us back in for regular help – that would free him up to work on what he did well, and win more clients to grow his business!
  • We got all his bills to pay, nagged him to check all his emails and that all bills were emailed to our account email, and entered them in the software – about 10-15 min work – now there is a list of what is due, and when! Up to date!
  • We reconciled the bank for the last month, checked where it was at because the accountant’s office was reconciling it monthly. And checked that the last quarter was correct, as some invoices were of the same $ but remittances from clients said they paid different ones and not always the oldest! Re-did some payments, aligned the correct ones paid. Up to date!
  • We synchronized the project software with his accounts software, and checked the 2 systems had the same invoices due, by number and $ – the invoices exported into the accounts software, but unfortunately the accounts can’t update paid invoices back into the project software – hopefully this will be rectified in time! Up to date!
  • Filed all paid invoices, checking back on the bank when paid and marking clearly as paid, then put in folder alphabetically.
  • Reported on clients due – debtors – accounts receivable, in an aged report to be able to easily see what was overdue – the business had 7 day terms – of course many larger businesses ignore and still pay on 30 day cycles! There were 12 well over due, 5 just a day over due, and 10 not due as yet
  • Reminders – emailed all over due outstanding receivables with a friendly tone, and “REMINDER” at the start of the subject message so it stood out
  • System – send reminders FORTNIGHLY – not monthly! It’s too long and people forget! And for those well over due – WEEKLY email reminders

RESULT

  • Over 3 weeks the old 12 outstanding accounts were up to date except 1!
  • Only 1 client needed to be called after several reminders, excuses, requests for invoices again by accounts – the usual delay tactics that indicate possible cashflow issues!
  • Regular clients realised we were on to them straight after the 7 days due!
  • 70-80% now pay before, on time, or a day or two after the time due!
  • Client has regular income to cover expenses
  • Client is sleeping better and serving prospective and new clients with more enthusiasm and energy!
  • Low costs – all this weekly for under a few hundred dollars!!!
  • Peace of mind with professionals handling what they can do very well!

Need help? Not sure? Call for FREE 30min advice / strategy session today!

0407 361 596 Aust

Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia