Download - Manage your Business Finances with QuickBooks

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A Simple Start to Managing Your Business Finances

A Guide to the Essentials

QB_10/2004_01

The following course covers the basics of financial management for your small business clients, and normally takes less than an hour to complete.

•We’ve included “talking points” but not a detailed script (we wanted to give instructors flexibility to present in the way that comes naturally and blend in their own perspectives and experience)

•Please feel free to expand, abbreviate or customize this course as you see fit.

Course Introduction: A common goal among almost all small business owners is to maintain ownership and control of their business – the good news is research shows that people who take classes and continue to learn, are more likely to succeed, so you’re on the right path! Let’s get started.

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1. Introduction to Financial Management

2. Why Accounts are Important 3. Using Reports 4. Managing Essential Tasks:

Practice Session5. Tips and Resources6. Appendix: Additional

Concepts & Terms

Financial Management Essentials

Today we’ll cover:

--What is Financial Management… and why do you need it?

--What are accounts…and why do you need them as well?

--Reports to understand how your business is doing – and make decisions for the future

--A quick practice session, to put all you’ve learned into practice

--Some tips and resources for getting started: Classes, online resources, and advisors who can help YOU manage YOUR business

And then we have an appendix with additional concepts and terms, which we’ll get to as time permits.

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1. What is Financial Management?

Process of:

• Running your business

• Recording money coming in and out

• Using reports to:

•Understand how your business is doing

•Make decisions

What is Financial Management?

Financial management is simply process of:

1. Running your business (tasks you are already doing today)

2. Accurately recording money coming in and out of business (you are probably already keeping track of this as well – so we’ll discuss how, as well as the possible benefits of a more systematic approach).

3. Using reports to understand how your business is doing and make decisions

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Six Ways Financial Management Helps Your Business Succeed

4. Compliance.Report your

company’s incomes, expenses, and payroll accurately to the IRS.

5. Insight and Decision Making.Make informed decisions – and price your product or

service for profitability – with financial reports

6. Funding.To be considered for a loan or investment, you’ll need complete financial statements.

1. Cash Flow.Track the money going in and out of your business.

2. Manage Customers and Sales.Know and understand your customers through consolidated records.

3. Production.Obtain goods and

services. Apply for and establish credit with

your vendors.

YOUR BUSINESS

Why take the time to learn and use financial management methods?

Accounting is the language of business, so you and other parties (banks, IRS, etc.) should all speak the same language.

1. Stay on top of your cash flow: Track money in and out of your business. Even a profitable business can go bankrupt if it doesn’t track cash flow.

2. Manage your customers and sales: Track what they are buying, keep records up-to-date so you can contact them

3. Production & Inventory: Know how to obtain goods and services from your vendors and establish credit

4. Once your records are centralized, you can create reports for a variety of important activities:

A. Filing with the IRS

B. Understanding how your business is doing (this will help on pricing products and services)

C. Sharing your financial picture with third parties (banks, SBA, etc.) to secure loans

And then of course, tracking the money going in and out of your newly larger business. All companies, even huge established one’s with billions in revenue and tens of thousands of employees rely on financial management for these six areas

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Information is Power

What do you want to know about your business?

• How much money am I bringing in?

• How much am I spending?

• Is my business making any money?

• What’s the value of what my business owns?

• How much does my business owe to others?

• What is my business worth?

Sales

Expenses

Sales – Expenses

Assets

Liabilities

Equity

Participation Question:

What are the key questions you have about your business to help you know where your business stands?

(Note: create list of things clients would like to know about their business.)

There are certain questions all business owners would like answered. Businesses that practice sound financial management and record-keeping will have the answers to these questions (and more) at their fingertips.

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2. Financial AccountsWhy They Matter to Your Business

Accurate record keeping lets you understand and use all your information

•Money in from payments received

•Data on customers and vendors

•Record of your bank accounts

•Money out for checks written, refunds and other expenses

Participation Questions:

How do you currently keep track of your business?

•Sales and invoices?

•Customer and vendor lists?

•Bills and checks?

What are some of the challenges you face with record-keeping today?

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Cash Flow: Money In and Money Out

CUSTOMERS

Sales

Services / Products

Out

YOUR BUSINESS VENDORS

Expenses

Services / Products

In

Money In Money Out

Cash is King

A healthy cash flow is critical to the viability of your business.

The first step towards a positive cash flow is understanding your inflows and outflows: money in and money out.

•What does your business offer for sale?

•And then once your receive payment, what do you do with the money?

•Expenses. What type of products and services do you buy to keep your business running?

Your money in from “sales” and money out from “expenses” create your cash flow. These are two main account categories.

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Major Account Types

• Assets– Current (cash, inventory,

accounts receivable, etc.)– Fixed (property, vehicles,

machinery, etc.)• Liabilities

– Current (within one year)– Long Term

• Equity– Contributed capital: owner’s

investment– Retained earnings (profits)

Assets = Liabilities + Equity

Everything your business

possesses

Everything your business has

borrowed

Everything your business owns

There are five major account categories total. In addition to sales/income and expenses, the other major account types are assets, liabilities, and equity.

Assets (what you have) = Liabilities (what you borrow/owe) + Equity (what you own)

Assets

Current (cash, inventory, accounts receivable, etc.)

Fixed (property, vehicles, machinery, etc.)

Liabilities

Current (within one year)

Long Term

Equity

Contributed Capital: What investors, stockholders, family members, partners, owners, etc. invest in the business

Retained Earnings: The total cumulative net profit a business earns over its life, and not yet distributed


Any questions? Now is a good time to ask! There are no bad questions. We’re all here to learn.

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Categorize Your TransactionsWith a Chart of Accounts

Chart of Accounts• Master account lists – a chart of accounts – are used to sort your transactions into categories• Each account category contains sub-accounts

The master account list, or Chart of Accounts, contains all the different categories used to organize your transactions. Think of each subcategory as a file folder, divided by type (e.g., your expense accounts might include subfolders for advertising, car expenses, payroll, and office expenses).

Quick Tip:

Try to keep your Chart of Accounts as simple as possible w/o too many subcategories. Financial software programs like QuickBooks Simple Start can help you get started with a basic Chart of Accounts.

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Chart of Accounts:Your Master List of Accounts and Sub-Accounts

ExpenseUtilities

Other expensesOther expenses

(Business’ profits)ExpenseTaxes and licenses

EquityRetained EarningsExpenseSupplies

(Owner’s invested funds)ExpenseRepairs and maintenance

EquityContributed CapitalExpenseOffice expenses

EQUITYExpenseEntertainment / meals

Other Current LiabilitySales Tax PayableExpenseCost of goods sold

LiabilityLoansExpenseContract labor / payroll

LIABILITYExpenseCar and Truck Expenses

AssetEquipmentExpenseAdvertising

Other Current AssetUndeposited fundsEXPENSE

Accounts ReceivableAccounts ReceivableOther incomeOther income

BankCheckingIncomeSales

ASSETINCOME

NAME TYPE NAME TYPE

Here’s a sample chart of accounts.

Your accounts might differ slightly, but the accounts shown here cover the basic categories a business needs to properly record it’s transactions.Of the accounts listed above:•Income comes from sales.•Asset categories are: Accounts Receivable; Sales; Savings; Checking, Undeposited fund; etc. •Expenses are extensive: advertising, car and truck expenses, commissions and fees, contract labor, etc.•Assets are your bank accounts, cash on hand. •Liability categories are mortgage, loans, payroll etc. and other current liabilities (sales tax payable). •Equity categories are: Owner’s Capital, and Opening Balance Equity.

Quick Tips:•Avoid common mistakes: 1. Creating too many accounts 2. Setting up all accounts, including expense accounts, as bank accounts•It is important to properly classify all transactions as the are entered – don’t classify anything as miscellaneous. It will take you much less time to classify accounts properly as they are entered than having to go back and reclassify later. •To help you with your chart of account categories, you may want to have an expert consultation (FREE!) with an SBDC counselor or QuickBooks ProAdvisor (more details at end of presentation)

We’ll come back to accounts later when we try a practice problem.

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Accounts: What We’ve Learned

• Consolidate your record keeping

• Use a standard set of accounts or categories to “file away” transactions—there is a common language

• Keep it simple: Significant accounts only

Use Industry Specific AccountsMaster account lists –a chart of accounts –are readily available for most types of business. Choose one specific to your industry, and make minor changes if needed.

So the five major account types are: sales, expenses, assets, liabilities and equity. These accounts, broken down into sub accounts, are used to classify your transactions. The master account list – a chart of accounts –includes all the different categories used to organize and “file” your transactions.

There is a record-keeping category or account that relates to each of the questions we discussed earlier (slide #5). If you keep track of information using those accounts, you’ll be able to answer all the questions, without any extra work.

•How can you measure your profits are? (“Sales minus Expenses”)

•What category tells you what you’re business is worth? (“Equity”)

•Etc.

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3. Reports Understanding Your Business and Decision-Making

• Use reports as a planning tool

– Gain insight into your sales

– Income statement (P&L) shows your profitability

– Balance sheet shows assets, liabilities and equity

• Regularly monitor your profitability –and your cash flow

Reports help you understand how your business is doing

If your business is a car – reports or financial statements are your dashboard. They allow you, as the business owner, the driver of the vehicle, to see how the systems are operating.

•Are you low on funds?

•Not earning a sufficient profit margin on your new product line?

Reports will organize the information you’ve “filed” away to help you see where your business stands and keep your business running smoothly.

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Make the Most of Your Reports

What do you want to know about your sales?

• What is selling?• Who is buying?• Who owes me money?

Gain insight into the health of your business with reports:• Sales by item• Sales by customer• Unpaid invoices by customer

Reports help you answer questions, such as which products are selling, who is buying, and who owes you money.

Reports can also show you how your sales compare to a previous period.

Three important sales reports are: Sales by Item, Sales by Customer, and A/R aging (Invoices that Haven’t been paid).

Quick Tip:

An “unpaid invoices” report, for example, can make collections easier and make sure no jobs or payments slip through the cracks.

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• Summarizes the revenue and expenses of a company over a period of time

• Also called a Profit & Loss or P&L

Income Statement


Do you currently produce a “Profit and Loss” report or “Income Statement” at your business? Why or why not?

•The income statement reports how your business performed over a certain period of time.

•Income statement is also know as “Profit & Loss,” or “P&L”

•The income statement shows whether or not your business was profitable over a certain period of time (normally either a full year or a period of three months).

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• Shows the assets, liabilities, and equity at a given moment in time

• Assets = Liabilities + Equity

Balance Sheet

Equity also referred to as Owners Equity or Retained Equity.

A balance sheet is a snapshot of your business at a given moment in time. It shows all assets, liabilities and equity.

“Current” assets and liabilities include those that have been incurred within a year.


Do you currently produce a “balance sheet” report for your company? Why or why not?

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4. Manage Essential TasksPractice Session: Mark’s Atomic Graphic Designs

Money inA. Record a saleB. Invoice a customerC. Receive a paymentD. Make a depositMoney OutE. Write a check / record an

expenseF. Use a credit card / record an

expense

Remember, the better you understand your cash flow situation, the better you’ll be prepared to make the right business decisions.

As a business owner, you need to understand the essential processes of tracking your money coming in and your money going out. Remember, your reports are only as good as your records!

We’ll now walk through 6 common accounting tasks, so you can get a feel for the how to categorize a transaction, as well as understanding of how the transactions impact the reports.

“Hands-on” Option

If students have computers they can try these tasks hands-on.

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A. Record a SalePractice Session – Money In

Money In: Record a Sale

Customer buys business cards.

Pays on spot with cash.

You issue sales receipt.

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Before we begin the practice sessions, do you have any questions? If you’re unsure about any of the points we’ve discussed so far, let me know. We can talk it through, so you will feel more confident.

[Begin Session]

A sale is “money in.” When a customer pays in cash, what do you do? (Issue a sales receipt.)


And what are the most important pieces of information you need to track about a sale? (Think about the sales receipts you get when you buy something in the store).

“Hands-on” Option:

Click on “Sales Receipts” and Create a “New” receipt.

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Issue sales receipt

Record:1. Customer2. Item3. Quantity4. Payment type5. Date

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Track Your Business

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Quick Tip:

Note that you record this “on-the-spot” transaction as a sales receipt, not an invoice.

A common mistake is to record this type of transaction (on the spot sale) incorrectly.


Go to “File/Open Company” and select the “Sample Company File.”

Enter the following information on the sales receipt.

1. Select “Cristina Andres” as the customer.

2. Under “item”, select “Add New” and type in “Business Cards.” Make the price “$200”

3. Enter “1” as the quantity

4. Enter “Cash” as the payment method.

5. “Use 12/15/2007 as the date.”

6. “Save and Close”

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See Where Your Business Stands

Profit & Loss6. Sales

increase by $215.50.6


How would this sale affect your Profit and Loss report?


1. From the Home-Page, click on “Profit and Loss” Report in the middle of the screen.

2. Click on the “Sales” to drill down deeper to see all the company’s sales in that time period. (You can see the recent sale to Cristina Andres at the bottom of the list.)

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B. Invoice a CustomerPractice Session – Money In

Money In: Invoice Customer

Customer buys graphic design services.

You complete the design.

You invoice customer.

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An invoice is a bill for payment later (compare to a sales receipt).


Click on “Invoices” and Create a “New” invoice.

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Track Your Business

Create invoiceRecord:1. Customer2. Service3. Quantity/hours4. Payment terms5. Date

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1. Select “Senna Computers” as the customer.

2. Enter “Graphic Design” is the item purchased.

3. “2” is the quantity.

4. The terms are “Net 60”

5. The date is “12/15/2007”

6.“Save and Close”

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Profit & Loss7. Sales

increase by $90.

Balance Sheet8. Accounts

receivable increase by $90.

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How would this sale affect your Profit and Loss report? What about your balance sheet?

Notice that the A/R line on your Balance Sheet increases.

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C. Receive a PaymentPractice Session – Money In

Money In: Receive Payment

Customer pays by check for business card design services invoice.

Record receipt of payment.

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Senna Computers pays you for the graphic design services. So you “receive” the payment against the outstanding invoice.


Click on “Receive Payments” to Receive a “New” payment.

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Track Your Business

Receive payment

Record:1. Customer2. Payment

type3. Enter

amount

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1. Select “Senna Computers” as the customer.

2. Enter “Check” as the Payment Method.

3. Enter “$90” as the Payment Amount.


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Profit & Loss4. Unchanged.Balance Sheet5. Accounts

receivable decrease by $90.

6. Undeposited funds increase by $90.

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Undeposited funds appear in “Other Current Assets”


How would this payment affect your Profit and Loss report? (no change) What about your balance sheet? Notice that the A/R line on your Balance Sheet decreases.

Quick Tip:

When you receive payments, don’t make the mistake of just “depositing” the money. It’s important to receive the payment against the outstanding invoice so you have an accurate view of how much customers owe you and who still owes you money.

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D. Make a DepositPractice Session – Money In

Money In: Make a Deposit

Go to bank to deposit check for design services and cash for business cards.

Make deposit.1

Now you are ready to go to the bank and deposit the money you have received.


Click on “Deposits” to make a “New” deposit.

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Track Your Business


Make depositSelect:1. Undeposited

funds2. Account type

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Senna Computers

Undeposited funds include payments from customers that are not yet in your bank account.


Enter the following information on the deposit form:

1. Select the payments you would like to deposit and Click “OK.” (To “Select All,” click on the button in the lower left portion of the screen.

2. Select the account to deposit to: “Checking”


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See Where Your Business Stands Profit & Loss3. Unchanged.Balance Sheet4. Other current

assets decrease.

5. Checking / Savings increases.

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Undeposited funds appear in “Other Current Assets”


How would this payment affect your Profit and Loss report? (no change) What about your balance sheet?

Quick Tip:

Your “profit and loss” in this case is not affected– you already recorded the sales when you issued your sales receipt and invoice.

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E. Write a Check / Record an ExpensePractice Session – Money Out

Money Out: Write a Check

Pay your telephone bill by check.

Write check / record expense.

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Let’s say you are going to pay a telephone bill by check.


Click on “Write Check” to create a “New” check.

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Track Your Business


Write checkSelect:1. Payee2. Amount3. Transaction

type (Expense --Utilities)

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Enter the following information on the check form:

1. Select “Cal Telephone” as the Payee.

2. Your regular payment is “$45”

3. Select “Utilities – Expense” as the account or category to file this transaction under.

4. “Save and Close.”

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See Where Your Business StandsProfit & Loss4. Expense

(Utilities) increases by $45.

Balance Sheet5. Checking /

Savings decreases by $45.

6. Equity decreases by $45

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How would this payment affect your Profit and Loss report? (expense) What about your balance sheet?

Quick Tip:

Individual transaction may not make that large a difference on financial statements, but all together these reports are powerful in helping you see where you business stands.

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F. Use Credit Card / Record an ExpensePractice Session – Money Out

Money Out: Use a Credit Card

Buy office supplies with credit card.

Use credit card / record expense.

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Let’s say you are going to buy office supplies with a credit card.


Click on “Record Expense” to create a “Credit” transaction.

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Track Your Business

Update credit card register

Select:1. Payee2. Transaction

type (Expense -- Supplies)

3. Amount1 3

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Enter the following information on the check form:

1. Select “Burge Hardware and Supplies” as the Payee.

2. Select “Supplies – Expense” as the account or expense category.

4. Enter “$95” as the amount.

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See Where Your Business StandsProfit & Loss4. Expense

(Supplies) increases by $95.

Balance Sheet5. Credit cards

increases by $95.

6. Equity decreases by $95.

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Balance Sheet: Increases your “Credit Card” liability and decrease “Equity.” When you eventually pay the credit card bill, you’ll decrease Liabilities and Assets (checking).

By using credit cards, you are actually spending the money as soon as you make the charge. Your credit card company is just paying the bill for you and allowing your business to pay back later.

Quick Tip:

Many business choose to enter their credit card transactions several at a time, when they receive their monthly statement.

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6. Tips and Advice

1. Getting Started2. Helpful Resources3. Online Resources4. Congratulations!

Now it’s time to get started using what you’ve learned and also find out about where you can get help if you need it.

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Getting Started

1. Build your toolkit– Consider software packages such

as QuickBooks Simple Start (Trial Edition is available)

2. Structure your accounts– Start with a minimum # of accounts

and add as needed3. Establish an accounting

routine – and stick to it– Reconcile accounts monthly– Update financial statements

quarterly

Establish Good Accounting Habits1. Record transactions regularly2. Accuracy and consistency are essential3. Fix mistakes as they happen4. Manage and reconcile bank account regularly

Good accounting habits:1. Record transactions regularly:

Buying/Expenses: bills, checks, credit, paying employees, contractorsSelling: estimates, invoices, sales receipts, collectionsPurchasing: Managing and adjusting inventoryCredit card transactions (don’t forget these)

2. Accuracy and consistency are essentialDon’t classify many items as “miscellaneous”

3. Fix mistakes as they happenEveryone makes mistakes, and they can be fixed.

4. Manage and reconcile bank account regularly

Always make sure your bank account records are up-to-date

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Helpful ResourcesAdvance Your Knowledge

• Professional Help– Accountants

• Look for knowledge of your industry– QuickBooks ProAdvisors

• Expert set-up can save you time• Free 1-hour consultation

– Small Business Development Center (SBDC) counselors

• Training Tools– Take classes (either online or at local

colleges)– Attend local business seminars– Build a network with other business owners– Use QuickBooks learning solutions

Expert help can make the process of setting-up and maintaining your books much easier. Be sure to look for a professional with knowledge of your industry – and of course, don’t be afraid to ask for references.

Help is available! You don’t need to go this alone.

•Class and coaching are a recipe for success. A Kauffmann Foundation study shows that business owners who take classes—particularly 3 or more classes—are significantly more likely to succeed.

•Don’t be afraid to seek professional help.

•A Small Business Development Center advisor or an accounting professional can help you review your Chart of Accounts.

•SBDCs offer free counseling and low-cost training

•Many QuickBooks Pro-Advisors offer 1 hour of free consultation to get business started on the right track

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Online Resources

Small Business Development Centerswww.sbdc.gov/sbdc

Internal Revenue Servicewww.irs.gov/businesses/small/

U.S. Chamber of Commercewww.uschamber.com

Try QuickBooks Simple StartEdition (Free Trial)www.quickbooks.com

Find a QuickBooks ProAdvisor www.usequickbooks.com/locateadvisor)

The SBA site offers news, online finance and management resources as well as links to local SBA offices.

The IRS site is a good resource for what you’ll need to know for all taxation issues. Includes forms and other resources.

The U.S. Chamber of Commerce site can help you locate a local Chamber of Commerce.

And the Intuit QuickBooks site lets you evaluate if QuickBooks is the right tool for your financial management needs.

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Congratulations!

You now know:• Why financial management is critical to

effectively run a business• How to set-up and manage your accounts • The usefulness of financial reports

Time to put your knowledge to work! Good luck!

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Appendix: Additional Terms and Concepts

A Simple Start to Managing Your Business Finances

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1. Business types2. Cash or accrual3. Debits and credits4. Journal5. Ledger

Financial ManagementTerms and Concepts

We’ve taught you the basics to get started with good record-keeping. There is always more to learn.

Here are a few terms and concepts you may run across as your grow your business.

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1. Sole Proprietorship • One owner

2. Partnership or Limited Liability Corporation

• Two or more owners3. S Corporation

• Small business with one or more shareholders

4. C Corporation • Large business with one or

more shareholders5. Non-profit Organization

Determine Your Business Type

There are more than 23.7 million small businesses in the United States. 572,900 new firms are founded each year.

Source: SBA, Office of Advocacy. Based on 2003 data.

A study by Kauffmann Foundation suggests that the number of new businesses may even be as high as 2.5 million. This larger audience may not be incorporated or registered.

Each type of business structure has advantages/disadvantages. Your tax accountant or other business advisor may be able to recommend which structure is best for your business.

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Cash or Accrual?A. Cash accounting

• The practice of recording sales and expenses only when cash is actually received or paid out

B. Accrual accounting• The practice of reporting income when

earned and expenses when incurred• Businesses with inventory (e.g.

retailers) must use this methodMost businesses opt for accrual

method of accounting• At any given time, gives a more realistic

picture of the health of the business

Choosing an Accounting Type

Choose whichever accounting method works best for you –the important thing is to be consistent once you’ve selected an accounting type

You need to understand the difference between these two methods of accounting so you’ll know what to declare for tax purposes.

You may need to consult a business advisor or accountant to determine the correct method of reporting for your business.

The IRS requires businesses with inventory (e.g. retailers) to use the accrual method of accounting.

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Debits and CreditsDouble Entry Accounting

• Accountants use “debits and credits” to describe how transactions are recorded in the general ledger

• Each transaction increases one account and decreases another

• System balances itself

You don’t need to be too concerned with the mechanics of double entry accounting, debits and credits, as software programs handle automatically. But as a business owner, you might run into these terms.

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Mark’s Atomic Graphic Design:Journal

Journal entries capture all cash in and all cash out activity.

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Mark’s Atomic Graphic Design:General Ledger

General ledger (GL) shows all activity by account type.

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Intuit would like to thank the following advisors for their help developing this presentation:

• Peter Pappas, Regional Director, Connecticut Small Business Development Center, Groton, CT

• Neal Nelson, Counselor, Maricopa Community College Small Business Development Center, Phoenix, AZ

• Charles Eason, Director, Solano College Small Business Development Center, Fairfield, CA

Acknowledgements

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