ACCOUNTING HACKS TO

GROW A SUSTAINABLE BUSINESS

TABLE OF CONTENTS

1 The Current Accounting Crisis

2 The Real Purpose of Accounting

3 Key Insights Derived from Accounting

4 How Budget Allocation Guarantees Profitability

5 How Capital Investment Guides Growth

6 How Dividends & Ownership Draws Impact Your Business

7 The Big Picture of Accounting

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Chapter

Chapter

Chapter

Chapter

Chapter

Chapter

Chapter 01: The Current Accounting Crisis

Many American businesses are in a f inancial crisis. Mil l ions of entrepreneurs are doing business without any true understanding of their f inances.

This is l ikely due to the fact that many entrepreneurs vastly misunderstand the role of accounting in their business.

Some make the mistake of neglecting their accounting responsibil it ies until tax time, and fumble at year-end to consolidate their f inancial records.

Others mindlessly perform “monthly bookkeeping” in effort to stay on top of

their f inancial records. However, in many cases, the reports generated are not reviewed, analyzed, or remotely under-stood.

We have developed a horrif ic habit of simply “checking the box” when it comes to accounting. We dread the the thought of accounting, and only do it to comply with the law.

Unfortunately, this naive mistake often comes back to haunt many of us. And when it comes back to haunt , it typically kil ls.

8 out of 10 US businesses will fail due to cash flow problems.

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There is not much you can do when you

realize you do not have enough money in

the bank account to pay employees,

contractors, or vendors.

Or when your business revenue spirals

downward due to your lack of strategic

planning and business investment .

We developed this eBook to guide small

business owners who do not want to fail

due to f inancial mismanagement . This

eBook will help you make smarter deci-

sions regarding your f inances.

It is t ime to make a change in your busi-

ness, and to take control of your busi-

ness direction through the guidance of

accounting.

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Chapter 02: The Real Purpose of Accounting

Organization

The textbook definition of accounting is to organize and report the f inancial information of a business in order to make better business decisions.

Three important words to pay close attention to - organize, report, and decisions.

Liabilities Loan

Equity Retained Earnings

CATEGORYRevenue Sales

Assets Cash

Expensenes Cost of Goods

EXAMPLE

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Organized and categorized transactions should be reported in a format that is easy to understand.

The three most commons reports are your income statement , balance sheet , and cash flow statement . It displays your business income, net worth, and its abil ity to meet upcoming f inancial obligations.

Ever y month, your business may make dozens, hundreds, or thousands of transactions. This must be organized and categorized appropriately to interpret your f inancial health.

These categories include revenue, expenses, assets, l iabil it ies, and equity

Reporting

Decision-making

Accounting reports should help businesses make strategic decisions to grow.

These strategic decisions typically involve deciding the best way to use business resources (ex: excess profits, cash, etc.) to increase the value of the business.

The accounting dilemma for businesses

I f someone wants to invest in your business, they will typically want to review your f inancial reports.

Likewise, i f you are seeking debt f inancing, such as a corporate loan, lenders will often request audited f inancial statements.

Why?

Because they are seeking to make sound strategic decisions regarding your business.

Now, ask yourself this - how often are you reviewing your business f inancial statements to make strategic decisions?

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According to bil l ionaire Warren Buffett , accounting is the language of business.

Unfortunately, it is a language that many do not understand. And it is incredibly difficult to value something you do not understand.

This lack of understanding results in anxiety, neglect , and fear of anything related to f inancial accounting.

When this lack of understanding is not corrected, the future of your business is at r isk .

In the upcoming sections, you are going to learn the “big picture” of accounting and how to reduce any l ingering anxiety that is preventing you from taking control of your business f inances.

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Chapter 03: Key Insights Derived from Accounting

The decisions you make regarding these three critical areas will determine the future livelihood of your business.

The most valuable business decisions derived from accounting information is:

Budget Allocation - What to do with what you earn Capital Investment - What to do with excess earnings Dividends & Owner Draws - What and how much to pay investors

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Chapter 4: Budget Allocation - What to do with what you earn

It is crit ically important to set and follow

a budget to prevent the mismanagement

of incoming funds to your business.

Dave Ramsey says that “ever y dollar

should have a destination” when

budgeting. This means that there should

be a plan for ever y dollar your business

earns or possesses.

An easy way to do this is to consider the

types of revenue and expenses your

business has, and allocating a

percentage to it .

It typically begins with a sales projection, which is based on historical sales revenue.

A budget is a financial plan to utilize the resources derived from sales revenue.

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The percentage that you allocate to expenses should represent the percentage of revenue that you deem necessar y to allocate to it . The goal is of this allocation is to determine how much of your sales will be used to cover certain expenses, and how much you will profit .

Using your projected sales, which is $1,322,500 in the example, you can f ind the exact budgeted dollar amount for each item by multiplying projected sales by the percentage.

Now, you can view your budget in

percentage allocation and dollar format .

The US Small Business Administration,

and several other research websites, may

provide budget averages for your type of

business. However, you should exercise

caution when relying on general

information to determine your budget .

Your budget should be specif ically

aligned to the nature of your business.

There is no “one size fits all” budget that can be applied to any business.

You ultimately control the ship. You decide how much profit you want make from sales, how much you want to pay employ-ees, how much you want to spend in advertising, and so on.

The amounts you spend should be aligned with your strategic goals to grow your business.

Remember, the goal of budgeting is to decide how YOU will allocate your busi-ness resources, and remaining faithful to your budget.

If you remain faithful to your budget, your business will always be profitable.

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Chapter 5: Capital Investment - What to do with excess earnings

Though, more decisions arise when determining what to do with the profit you earn.

Will you leave it in the business to re-invest or use it to pay yourself ?

In this section, you will learn how to use excess profits to reinvest into your business, or in other words, make capital investments.

What are capital investments?

Capital investments are funds set aside to further your business objectives.

Business objectives are typically aligned with your organization’s long-term strategic plan.

Business revenue growth is rarely accomplished by luck. It is an intentional outcome that is reached through strategic planning, resource

allocation, and execution.

For example, Amazon produces nearly $200 bil l ion per year in revenue. The founder, Jeff Bezos, was officially announced the richest man in the world in 2018. By looking at the numbers, Amazon is one of the fastest growing companies in the world.

However, many are unaware that Amazon reinvested 100% of its profit into the business for nearly 14 years. They were .

Common business objectives include:

Increasing growth (increasing revenue, decreasing cash)

Increasing efficiency (decreasing expenses, increasing cash)

Following a precise budget guarantees profitability.

Amazon’s CEO, Jeff Bezos, in 1994

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technically “unprofitable” for years because of how aggressively they invested their capital.

They were Google’s biggest spender in

advertising for a period of t ime. They

also expanded revenue streams through

adding more products and ser vices, such

as their cloud ser vices.

The bil l ion-dollar giant also cleverly

used mergers & acquisitions to quickly

expand into new markets. For example,

Amazon acquired Whole Foods.

v

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products and ser vices yielded the highest dollar amount of revenue? How much cash does your business have to invest?

These are answers that can be found through timely, organized accounting reports. And through analyzing these reports, you can make sound decisions to increase business growth.

Increasing Growth through Marketing and Advertising Activities

To increase business growth, most businesses start by investing into advertising.

Smart advertising is relevant , measurable, and effective. To make smart advertising decisions, you must quantify the impact of any advertising campaign.

Any advertising your business invests in should be measured in quantif iable results, which are displayed on your f inancial statements.

There should be a correlation between advertising expenses and revenue, and if there is not , then there is a problem.

This correlation is known as your return on advertising spend, also known as ROAS.

You can compute your return on ad spend by dividing total revenue by advertising expenses on your income statement .

You can accelerate your business growth

by:

Investing capital into more

marketing and advertising

Investing capital improve quality

and customer satisfaction

Investing capital into the

development of new products and

ser vices

Investing capital into mergers &

acquisitions of businesses

In general, business growth is t ied to

increasing market share in existing

markets and/or expanding to new

markets.

The concept is simple, however,

application of these principles are more

complex in nature.

This is because it is impossible to make

any strategic decision without f inancial

reports. To make decisions regarding

business growth, you must analyze your

income statement , balance sheet , and

cash flow statement .

Which marketing activities yielded the

highest return on investment? Which

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you may need to restructure the way your products and ser vices are developed or delivered.

In order to do this, you will need to assess key performance indicators surrounding your customers, such as perceived value and actual value.

Perceived value will influence the rate of new sales and customers your business receives.

Actual value and customer satisfaction will influence the rate of repeat business and referrals your business receives. It wil l also influence your brand’s reputation and reviews, which new customers will assess.

This can be assessed in quantitative formats through customer sur veys, feedback forms, and inter views.

Many companies, such as Intuit , sends emails to their customers after interactions with their customer ser vice department . For example, a question on the sur vey might state “on a scale of 1 to 5, how likely are you to refer someone to our business?”. And then management evaluates the responses to derive insights around client satisfaction.

In general, you want to invest into marketing and advertising activities that yield the highest ROAS, and eliminating low-performing advertising activities.

When considering new advertising activities, always tr y to estimate your ROAS to ensure sound business judgment .

Estimate the impressions and traffic that new advertising activities will generate, and use historical conversion rates to estimate your ROAS from new activities.

If you estimate, monitor, and re-evaluate your ROAS across your business advertising activities, you will be able to quickly grow your business.

Increasing Growth through Value Proposition & Customer Satisfaction

Let’s face it .

You can invest mill ions of dollars into effective advertising strategies, but i f the product or ser vice is not valuable to the end-user, ever ything fails.

Value proposition and customer satisfaction is vitally important to the success of any business.

Therefore, to increase business growth, you may also seek to improve your product value and customer satisfaction.

This may involve increasing inputs and costs to improve the overall quality of your product or ser vices. Or perhaps,

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ser vice l ines. Or, you may take existing products to new industries.

You will need to rely on f inancial metrics to make these decisions.

You might start by examining your income statement in detail to identify the most profitable products or ser vices you offer. You may decide to expand into more product l ines associated with your top-performers.

You might also examine your highest-paying customers. You may decide to allocate more resources to targeting specif ic markets related to the demographics of your most valuable customers.

Regardless of your thought process, you must rely on internal and external f inancial information.

Internal f inancial information, such as your income statement , wil l help you base decision-making on what has historically worked for your business.

External f inancial information, such as independent market research, wil l help you gauge market conditions to make sound decisions.

Increasing growth through mergers & acquisitions of businesses

The aggregate results on sur veys l ike this are looked at on a continuous basis to measure staff performance, and your overall value proposition from the lens of your customers.

Data surrounding customer satisfaction is considered a “non-financial” key performance indicator of a business.

It does not appear on the f inancial statements, but it directly impacts f inancial statement results.

Your business must identify all key performance indicators (KPI’s) that directly impact your f inancial performance, and measure this on an ongoing basis, to make sound strategic decisions.

Increasing Growth through New Products, Services, and Industries

At some point , you may have maxed out the market potential for your business. Perhaps, you’re happy with your value proposition and have exhausted all effective advertising opportunities to grow.

Or maybe, you simply want to grow faster?

You may decide to make capital investments into new product and

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Investing to increase business efficiency is about making capital investments to lower the cost of your business operations. It ’s about increasing speed and eliminating fat in your organization in order to facil itate a smooth operation.

This may involve buying new machiner y, restructuring your organization, upgrading training, or simply eliminating unproductive expenses.

For example, i f investing into new machiner y helps your staff produce more products at a lower cost , it may be sound capital investment .

Perhaps your business grows to where you can restructure your organization that aligns unique skil ls with specif ic tasks to boost efficiency. I f you hire employees with more experience and specialized skil ls, you may be able to deliver your product or ser vice faster.

Or maybe there is just fat that needs to be cut?

Are you experiencing too much inventor y turnover or spoilage?

Are you spending dollars in marketing that is not resulting into increased revenue?

Are your customers paying your invoices

Using business mergers & acquisitions to expedite business growth is becoming more common in today’s business environment .

Firms, both large and small , are strategically aligning with other f irms to multiply the business growth received.

Mergers & acquisitions are ver y complex, so we will not spend much time diagnosing the f inancial considerations in this text .

However, you should know that this is a ver y common growth strateg y, and that the decisions regarding mergers & acquisitions are primarily based on f inancial performance.

Financial statement analysis of both entities allows key executives to exercise sound judgment in regards to merging with or acquiring f irms for business growth.

Investing to increase business efficiency

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Using business mergers & acquisitions to expedite business growth is becoming more common in today’s business environment .

Firms, both large and small , are strategically aligning with other f irms to multiply the business growth received.

Mergers & acquisitions are ver y complex, so we will not spend much time diagnosing the f inancial considerations in this text .

However, you should know that this is a ver y common growth strateg y, and that the decisions regarding mergers & acquisitions are primarily based on f inancial performance.

Financial statement analysis of both entities allows key executives to exercise sound judgment in regards to merging with or acquiring f irms for business growth.

Investing to increase business efficiency

You can apply specif ic ratios to your

f inancial statements to identify areas of

inefficiency in your business. Below are

some of the most common types of

ratios:

1. Liquidity Ratios

2. Activity Ratios

3. Profitabil ity Ratios

Liquidity Ratios

Liquidity ratios measure the l iquidity

(available cash) of your business.

This is often compared to l iabil it ies

(debts) to determine your company’s

abil ity to meet its short-term

obligations.

For example, the current ratio is a

common liquidity ratio. To compute your

current ratio, use your balance sheet and

divide the current assets (cash) by

current l iabil it ies (short-term debts).

High l iquidity means that there is plenty

of cash to meet short-term obligations.

Low liquidity may indicate the opposite,

such as short-term debts exceeding

short-term assets, possibly indicating

bankruptcy in the near future.

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Inventor y turnover measures your abil ity

to convert inventor y into sales. High

inventor y turnover means that are

sell ing inventor y at a fast rate. Low

inventor y turnover may indicate that you

are sell ing inventor y too slow, resulting

in cash flow, profitabil ity, and inventor y

spoilage risks.

Accounts payable turnover measures

how quickly you pay your debts. High

accounts payable turnover means that

you are paying debts quickly. Low

accounts payable means that you are not

paying debts quickly.

I f cash is low, a business may elect to

slow down their accounts payable so

that they have more cash to meet

short-term needs. I f cash is plentiful,

then a business may elect to pay debts

sooner.

In any event , it is important to look at all

activity ratios to identify areas of

concern to your business and plan

accordingly.

Profitability Ratios

Profitabil ity ratios measures the f irm’s

abil ity to generate earnings relative to

By monitoring your company’s l iquidity,

you can ensure that your company has

enough cash to cover expenses.

Activity Ratios

Activity ratios measures a f irm’s abil ity

to convert different accounts on its

balance sheet into cash or sales. For

example, three common activity ratios

are:

Accounts receivable turnover

Inventor y turnover

Accounts payable turnover

Accounts receivable turnover measures

your abil ity to collect money from

customers. High accounts receivable

turnover means that you are quickly

turning accounts receivable (money

owed to you) into cash. In other words,

you are collecting the money you are

owed.

Low accounts receivable turnover means

that you are slowly collecting money

that your customers owe you. You may

be sending invoices that customers are

not paying them on time. Or, the credit

card payments are declining at a high

rate.

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Low returns on assets may indicate that

assets are not performing to

expectations, or that they are not as

productive as you may have hoped in

generating more business value.

Low returns on equity may indicate that

your investors are earning ver y low

returns based on the investment they

made into your company.

Low return on investments may indicate

that the investment expenses (ex:

marketing, or new products/ser vices)

your company is incurring is not

resulting in increased earnings for your

business.

Financial Statement Analysis & Business Efficiency

In order to truly understand your

business health, you must be able to

understand and interpret your f inancial

statements.

You must develop budgets to follow, and

measure your actual performance

against that budget . Then, you must

interpret your actual performance and

the implications it may have for your

business.

expenses. In other words, is the business

profitable or not .

This is ver y important because many

business owners make the mistake of

judging their business based off of total

sales, which does not indicate whether

the business is actually making money

after expenses.

The single-most important profitabil ity

ratio is the net profit margin. It divides

total profit by total revenue.

You should always know your profit

margin, as it directly influences what

your investors’ take-home pay will be.

Three other important profitabil ity ratios

is return on assets, return on equity, and

return on investments.

All three measures your profit in relation

to the assets, equity, and investments in

your business.

All assets, equity, and investments in

your business should be deployed to

help your business increase earnings.

Therefore, high ratio results across all

three ratios would indicate your success

in accomplishing this.

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These implications, derived by ratio

analysis, wil l help you understand how

healthy and efficient ever y area of your

business is in reaching your strategic

goals.

Below are the formulas to all of the

ratios that can be used to derive the

insights described.

Liquidity RatiosCurrent Ratio: Current assets /Current

l iabil it ies

Working Capital: Current assets - Current

l iabil it ies

Activity RatiosAccounts Receivable turnover : Credit

sales / Accounts receivable balance

Inventor y Turnover : Cost of Goods Sold /

Average inventor y

Accounts Payable Turnover : Purchases /

Average Accounts Payable

Profitability RatiosNet Profit Margin: Net income / Sales

Return on A ssets: Net income / Average

Total A ssets

Return on Equity: Net income / Average

Total Equity

Return on Investment : Investment

Income / Investment Expense

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A s stated in prior sections, you determine your profit margin, budget allocation to expenses, and the capital investments you decide to invest in to expand and sustain your business.

What remains can be disbursed to you as a guaranteed payment , dividend, or owner distribution, based on your business type.

When determining your payout , we urge you to consider three major items:

Working capital - amount of cash

your business requires to operate

Balancing business interests vs.

personal interests

Tax implications of business

compensation

Chapter 06: Dividends & Owner Draws

Working Capital

When making ownership payouts from your business, you must ensure that you do not over-withdraw funds from your business.

If you take out too much cash, your business may run out of cash to pay short-term expenses and l iabil it ies, which may cause your business to default .

Thus far, you have learned how to use accounting to guarantee profitability through budgeting, and how accounting can guide capital investments.

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To prevent this, you need to assess and monitor your working capital.

Working capital, simply put , is current assets minus l iabil it ies. In other words, it is the amount cash your business needs to cover short-term obligations.

When making dividend payouts, you must be sure to leave enough working capital in your business.

To calculate how much money to withdraw from your business, use the following formula:

Total current assets - working capital = Maximum dividend payout

To be safe, we recommend leaving enough cash for working capital and unexpected expenses that may arise in your business.

Balancing Business Interests vs Personal Interests

When withdrawal money from your business, you must consider the opportunity costs of your decision.

For example, many business owners rob their business of growth by taking too much cash out of their business.

On the other hand, some business owners are so aggressive in reinvesting capital into their business that they may go a l i fetime without ever paying themselves.

There is certainly a level of r isk involved with either decision. You risk never being compensated by continuously investing in your business, and you also risk higher earnings potential with withdrawing cash from your business.

When it comes to how much to pay yourself from your business, there is no right or wrong answer. You must f ind the right balance based on your goals. Though, you should be aware of how the

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decision you make impacts your wellbeing.

Consider all factors and determine your philosophy towards dividend payouts to be comfortable with the amount of cash you withdraw from your business.

Tax Implications

There are also several tax implications that may apply to the amount of cash you withdraw from your business.

You can l imit your tax l iabil ity by investing into tax-deductible activities to grow your business.

For example, advertising is a tax-deductible expense. Therefore, i f you increased advertising expenses to grow revenue in the future, you may pay less in taxes in the short-term.

When it comes to dividends and ownership distributions, your tax l iabil ity will var y based on the type of entity your business is registered as.

For example, corporations are taxed differently than partnerships. When it comes to ownership compensation, it is important for you to understand the tax consequences of your specif ic entity selection.

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We hope that you close this eBook with

one message - it is impossible to grow a

sustainable business without the

guidance of f inancial and managerial

accounting.

Many successful businesses that fail are

not fail ing because they are offering

poor products and ser vices. Successful

businesses are fail ing because they are

running out of cash due to f inancial

mismanagement .

Entrepreneurs and business owners must

understand that accounting is much

more than generating reports to f i le a tax

return. We must return the foundation of

accounting - using f inancial information

to make sound business decisions.

Chapter 7: The Big Picture of Accounting

In this eBook, we’ve described how accounting can influence the most important areas of your business - profitability, growth, and efficiency.

They say that successful individual and

business are a result of the decisions

they make. You must make a decision

today to take control of your business

f inances to maximize the potential of

your business.

LYFE Accounting has experienced CPA’s,

CFO’s, Tax Consultants, and Investment

Advisers who are ready to help your

business overcome the unique

challenges it faces on a daily, monthly,

and annual basis. We developed LYFE

Accounting with one purpose - to help

businesses with all of their f inancial

accounting and reporting needs.

To learn more about our bookkeeping,

tax planning, CPA, or CFO ser vices,

contact us today at https://lyfeaccounting.com/contact-us/

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