Financial Record Keeping w/ QuickBooks

Introduction to Financial Record Keeping

February 2008

Cecile E. Reid, CPA, MBAPresident, Flat Rock Financial Services, LLC

What is Financial Record Keeping?

Every business has a Unique story to tell.

A Profitability Story

Money In, then Out then back In Again.

What is Financial Record Keeping?

Financial Record Keeping is the process of ensuring that your

business’ story is COMPLETE and CORRECT.

Why do YOU need Financial Record Keeping?

Who needs the complete story?

WHO?

And he isn’t alone!

More Importantly

?Who are my

best customers?

If I have to give up a job which one should I give up?

Will storage costs eat up my saving on this discounted

material?

Would I have turned a profit last month if that last minute

job hadn’t come along?

?

??

?

??

What is Financial Record Keeping?

Financial Record Keeping is the process of ensuring that your business’ story is

COMPLETE and CORRECT.

Financial Record Keeping consists of Bookkeeping and Accounting

Bookkeeping vs.. Accounting

• Every time one of the following activities occurs– Money changes hands, e.g. a sale or a purchase– Money is promised, e.g. a loan made or an

order is received

• A transaction is created.• In order to tell a complete story all of these

transactions need to be in one, central place.

Bookkeeping is….

…The process to record, in a central location, ALL of the money transactions a business makes, whether cash or promises.

What is Accounting?

• A good bookkeeping system must be set up so that transactions recorded can be analyzed in MULTIPLE useful ways.

• The system has to fit the business needs for information.

• The system must also be monitored so that it is working as designed.

• …

What is Accounting?

• Information must be extracted from the system so that it can be used to make decisions about ongoing business actions.

• Monthly checks and balances need to be performed to ensure the information gives an accurate story about the business’ profitability.

• …

What is Accounting?

• Timely reports have to be designed so that information is shown in a COMPARABLE manner.

• Monthly/Weekly/Qtrly reporting has to be consistently compiled so analysis is useful.

• This entire set-up, monitoring and reporting from the bookkeeping process is..Accounting.

Accounting is…

The process of organizing and analyzing the

centralized records.

Bookkeeping Recap

• All money transactions, whether they are actual cash transactions and guarantees of future cash transactions all need to be recorded.

• Bookkeeping is the process to record, in a central location, all of these transactions.

Accounting Recap

• The centralized bookkeeping system has to be designed to fit the needs of the business.

• The system needs to be monitored to ensure that it is functioning correctly.

• The information in the system has to be reported regularly with comparable consistency.

• The Accounting process designs, monitors and analyzes the centralized records.

Titles

• Accountant• Bookkeeper• CPA (Certified Public Accountant)• Tax Preparer

TitlesBookkeeperAccountantTax Preparer

A CPA is licensed to perform the functions of a bookkeeper, accountant and tax preparer.

Anyone performing accounting functions is an accountant but CPAs are state licensed.

Certified Public Accountant

Fundamental Fiscal

Understanding

What we will review:–Bank Reconciliation–Cash and Accrual Accounting–Asset Capitalization and Depreciation

Bank Reconciliation

• Bank Reconciliation Report maps out the difference between your bank statement and your bookkeeping records.

• Bank Balances do not represent the following:– Checks not yet presented– Deposits with holds

• Your Bookkeeping Records may not include– Interest earned– Fees assessed by your financial institutions.

Cash vs. Accrual Accounting• Affects the recording of transactions of

income and expenses • Cash Accounting recognizes transactions

on the day when cash has actually changed hands.

• Accrual accounting recognizes transactions when a commitment is made although no cash is transferred.

Cash Accounting

• It’s Easy!!!!• Cash in, Cash Out.• Drawbacks– Poor matching of Cash In to Cash Out– Not acceptable to most users of your records.– Expenses show patterns that are misleading.– All the information you have is not in your reports.

Accrual Accounting

• Captures Income and Expenses based on the accrual method of accounting.• Essentially, when it becomes

reasonable to assume that cash will be transferred in the future, then the transaction is recorded.

Handling Assets

• When a purchase is made, an expense is usually recorded.• IF that purchase will be used beyond

the end of the reporting year then the expense ought to be shared over the additional years.

Hypothetical Purchase

• E.g. a tractor purchased for $30k will work well for 10 years. – Suppose, in the first year expense would be $30K.

In the remaining years, expense would be zero.• Misleading trending in data• Tremendous impact on annual incomes.

Capitalization is…

• A system to record a major purchase in a way that spreads the expense involved over the time period that benefit is derived.

• It is a way to tell the profitability story more clearly by showing that the major expense has a long term payback.

• Instead of Capital Expense $30K, we have Capital Asset $30K

Depreciation is..

• The process by which the capital asset is then converted to expense over the several years.

• Instead of Capital Expense $30K in the first year we have multiple years of Depreciation Expense.

• So expenses are smoothed over a longer time period which is more in line with any revenue earned by the capital purchase.

But…..!

Expenses Influence Income

• The greater your expenses, the lower your income and the lower your tax burden by extension.

• So the calculation of Depreciation Expense is very important to the IRS because their “income” is directly impacted.

Depreciation Methods

• There are various “depreciation methods”, i.e. ways to convert a capital asset in one year to depreciation expense in subsequent years.– Depreciation methods based on time• Straight line method• Declining balance method • Sum-of-the-years'-digits method

– Depreciation based on use (activity)

What you need to know about Depreciation

• Depreciation can be calculated in various ways and each method has its pros and cons based on your particular business.

• Each asset type should have its own depreciation method determined by your accountant.

• Your tax preparer should determine how to depreciate to calculate taxable income

Land is a fixed asset that is not

depreciated.

Fundamental Financial Reports

• Core Statements that tell the story

–Balance Sheet–Income Statement–Statement of Cash Flows

Fundamental Financial Reports

Balance SheetA snap-shot.A picture of your business’ financial

strength at ONE point in time.All Assets = All Liabilities + All Equity

Balance SheetAs of DD/MM/YYYY

Assets

• Short Term and Long term Assets Separately

• Short Term aka “Current Assets”– Cash– Receivables

• Long Term aka “Fixed Assets”– Land– Buildings– Accumulated Depreciation

Liabilities

• Short Term and Long term Liabilities Separately

• Short Term aka “Current Liabilities”– Accounts Payables– Line of Credit– Accrued Payroll Liability and Withholding

• Long Term aka “Long Term Liabilities”– Mortgage Payable– Vehicle Loan Payable

Owner’s Equity

• Common Stock• Retained Earnings–Owner Paid In Capital• Cash Infusion to the business• Personal Equipment given to the business

–Net Income for the current year

Balance Sheet• Shows the strength and potential of your

business at a specific point in time• Must be in balance

i.e. (Assets = Liabilities + Equity)

• Assets and Liabilities expressed separately based on their life span

• Assets shown at capital cost with depreciation shown separately

• Must have an AS OF Date

Fundamental Financial Reports

Income StatementTracking of Revenues and Expenses

over a period of time.Answers two questions.

Has Management accessed/developed a profitable customer base?

Does Management know how to extract that profit?

Income Statement

Income Statement

Operating Costs vs. Overhead Costs

Operating costs are directly impacted by growth of the business.Overhead costs are less impacted by growth of the business.

Operating Costs

Operating costs are directly impacted by Gross Margin.

If sales go up, these costs go up.If sales goes down, these costs go down.Predominantly Sales Expense.

Overhead Costs

Overhead costs are less impacted by growth of the business.

If sales reach a certain level, these costs often go from zero to some set level.If sales goes down, costs stay put.Often the Bulk of Total Expense.

Income StatementPeriod (DD/MM/YYYY to DD/MM/YYYY)

Revenue Cost of Goods/Services Sold

Gross MarginOperating ExpensesOverhead Expenses

Income before TaxesTax Expense

Net Income After Tax (sent to Balance Sheet)

Fundamental Financial Reports

Statement of Cash FlowsOutlines the sources of cash for the

business during a specified period. Shows the cash usage of the

business during a specified period.Categories these cash flows.

Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY)

Cash Flow From Operations

Cash Flow From Investing

Cash Flow From Financing.

Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY)

Cash Flow From OperationsShould start with Net Income

+ and – adjustments like Receivable, and Payables, and if no

investing activity, Depreciation

Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY)

Cash Flow From Operations

Net Income $15,000.00

Increases in Cash

Decrease in Accounts Receivable during the periodIncrease in Accounts Payable during the period

20,000 3,000

Decreases in Cash

Increase in Accounts Receivable during the periodDecrease in Accounts Payable during the periodIncrease in Inventory

0 0 (15,000)

Net Cash From Operations $23,000.00

This shows an important phenomenon about customer payments!!

Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY)

Cash Flow From Investing

Increases in Cash

Proceeds from Sale of Equipment during the periodProceeds from Sale of Land during the periodProceeds from Sale of Stock/Securities during the periodAccumulated Depreciation for the perid

500 20,000 3,000 2,000

Decreases in Cash

Purchase of Equipment during the periodPurchase of Land during the periodPurchase of Stock/Securities during the period

( 13,500) ( 15,000) ( 17,000)

Net Cash From Investing ($ 20,000.00)

Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY)

Cash Flow From Financing

Increases in Cash

Proceeds from Mortgage arranged during the periodProceeds from Line of Credit arranged during the periodProceeds from Stock Offerings

2,000 60,000 0

Decreases in Cash

Interest Payments on Mortgage made during periodPay down on Line of CreditDividend Payments

( 500) ( 55,000) ( 0)

Net Cash From Financing $ 6,500.00

Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY)

Net Cash From Operations $ 23,000.00

Net Cash From Investing ($ 20,000.00)

Net Cash From Financing $ 6,500.00

Change in cash and equivalents during period $ 9,500.00

Cash and Equivalents, beginning of period $ 20,137.00Cash and Equivalents, end of period $ 29,637.00

Fundamental Financial ReportsCore Statements that tell the story–Balance Sheet

–What Resources does your business have and how much of that is free from prior commitments?

–Income Statement– Does this business have a profitable customer base

and does management extract that profit?

–Statement of Cash Flows–Where are the sources of cash for this business?

How vulnerable is it to fluctuations in cash?Can cash needs be met internally?

These reports convey useful and reliable information only if

they are based on accurate bookkeeping

and careful accounting.

This creates a tension for owner- operated businesses.

Owners hold management accountable for good financial record keeping.

When the owner is the manager, this discipline can be overlooked.

Barriers to Recordkeeping

Time Burden on management creates supply shortage of fiscal reports.

Owners not using the report results in reduced demand.

Barriers to Recordkeeping

Time Burden on management creates supply shortage.

–Accounting Software and Contract Workers

Owners not using the reports so there is reduced demand.

–Regular review of financials as a part of strategy setting.

Choosing Accounting SoftwareSoftware should:– Match the needs of your business

• For contractors, your software should be able to track costs to specific jobs; handle subcontractor billing and invoicing etc.

• Create estimates and convert to invoices.– Offer Expandability

• If you don’t accept credit cards right now but want to in the future, your software should have that capability.

• Ideally, that function should be purchased only when needed.– Create reports easily

• Once properly designed by your accountant, your software should offer ease of accept to timely reports.

• Capable of minor report modifications without needing your accountant.

Choosing Accounting Software

Some Options:• QuickBooks, • Peachtree, • Accpac, • and many more.

An accountant setting up the system for you, can help with selection. But the choice is YOURS.

Recap and Review

Key financial reports tell the story of your business’ present profitability and its potential in the future to your owners and other interested parties.

These reports are based on having all financial transactions captured in a central location (bookkeeping) that has been properly designed and monitored (accounting).

Recap and Review

Financial professionals such as bookkeepers, accountants and tax preparers are resources to help management satisfy the owner’s need for complete and accurate recordkeeping.

Accounting software is also an excellent resource to simplify functions and create reports.

Choosing the right accounting software decision requires matching the needs of the business with the capability of the software program.

Your Instructor:

Cecile E. Reid, CPA, MBA is President of Flat Rock Financial Services, LLC a professional accounting firm providing Fortune 100 fiscal thinking to organizations of all sizes, by serving as their financial services partner.

Ms. Reid earned her MBA from The Wharton School at the University of Pennsylvania. She also has Bachelor of Science in Accounting and Actuarial Science. Cecile is a licensed CPA and has served on the Board of Directors of a conglomerate with ~$1Billion in assets for over 5 years.

(215) 991-6261 flatrockllc@netzero.com