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Working Capital

How to make smart decision using Financial Statements

by Sanjeev Archak Sanjeev Archak No Comments

Okay. Let’s start with the most quoted phrase “Data is the new oil”.A business operation contains tons of data in receipts, vendor bills, customer receivables, subscriptions, inventory among other things.All this can be overwhelming for a business owner. This information if used and analysed correctly, can drive growth in the business. In this post we shall explore how to make smart decisions using financial statements.

What are financial statements?

Financial statements comprise of:

  1. Profit & Loss Statement
  2. Balance Sheet
  3. Cash Flow Statement

In addition to the above you can add Financial Forecast or Budget Statements to the list. Now, let’s examine each of these items and how it can contribute to your business.

Profit & Loss Statement

This statement is also called as Income Statement. This statement will show:

  1. Revenue: sales generated in a particular period
  2. Costs: expenses incurred in a particular period
  3. Profits: which is the net of sales and expenses

Maximizing profits must be the ultimate goal for a business. This information will help you create a budget, control your expenses and increase your revenue. In order to make informed decisions financial statements must be compared for different periods to form a trend. Here is how a trend can help:

1.Check how your business is doing

Maximizing profits must be the ultimate goal for a business. Gross profits and net profits are useful indicators. These are often termed as top line and bottom line. An upward curve for both top and bottom line indicates that your business is making money.

2.Where are you spending your money?

A cursory glance at your Profit & Loss statement will tell you where you are spending your money. Hence, ensure that there are clearly marked accounts in your expenses list like rent, salaries, and internet expenses. It is important to avoid accounts like suspense or loosely defined account heads like miscellaneous expenses. A multi-year comparison will tell you not just where you are spending but will compel you to look for reasons as to why you are spending.

3.Increase your margins

Margins are also called as Gross Profits. In simple terms Gross Profits=Sales minus cost of goods sold. What is Cost of Goods sold? Let’s take an example of a business selling toys.  The cost of purchase includes:

  1. Cost paid to the wholesale merchant/distributor
  2. Cost of transportation to the store
  3. Any other cost incurred in procuring the toys

It is important to note that cost of goods sold does not include indirect costs of such as rent, salaries or electricity. A lower cost of goods sold will lead to a higher margin. Therefore, in most businesses it is easier to control cost of goods than increase the sales price. A lower gross margin is a  sign that the business is under stress.

4.Impact of taxes

Taxes cannot be avoided. So there must be plans to minimize and plan your taxes. Tax planning includes a whole range of factors starting from selecting the legal entity for your business, availing sector specific deductions, labor law compliance’s etc. Always look for trained help to manage your taxes. Let our experts at Integra Books help you.

Balance Sheet

As the name indicates it is a statement that balances assets and liabilities. A balance sheet is a point statement i.e., that indicates the total assets and liabilities of a business as on particular date. Let us now look at what a balance sheet contains:

  1. Assets: this what your business owns
  2. Liabilities: this what your business owes

A healthy balance sheet must be asset heavy and light on liabilities. Further, while looking at a balance sheet you are likely to see terms like current assets, current liabilities, equity etc.

What is an asset?

Assets are what you have acquired to run your business. Assets are further divided into fixed assets and current assets. Fixed assets are defined as assets which are used to produce goods or render services. In other words, fixed assets are not held for sale. Examples of fixed assets include machinery, computers, and trademarks.

Current assets are typically held for sale. A prime example is inventory. Inventory is sold to generate revenue. Sales proceeds in the form of cash or bank balances are current assets as well. Dues from customers are also classified as current assets. Current assets can be converted to cash within six months to one year.

What are liabilities?

As the name suggests, liabilities are what a business owes to others including banks, lenders, vendors, credit cards, government and employees. Further, liabilities are grouped into current and non-current liabilities.Current liabilities are likely to be paid within one year whereas non-current liabilities are to be paid after a year.

How to compute working capital?

Working capital is the oxygen that keeps a business alive. How to compute working capital? It is done through a simple formula:

Working Capital=Current Assets minus Current Liabilities

A positive result means that the business will not run of cash in the near future. Whereas, a negative result means that a business will have to borrow money to meet expenses.

How does working capital impact a business?

All right let us break this down. Two important items of current assets are customer dues and inventory. High customer dues will lead to low cash balances as recovery is low. Similarly, a high inventory means that sales are low. Money invested in producing these goods is not getting converted to sales. 

Therefore, with cash becoming scarce a business no option but to hold off on paying current liabilities. This will lead to delayed payments to vendors, lenders or even employees which can lead to  halting the business.

What is equity?

Equity is what the sole owner or shareholders have invested in the business.  Theoretically, the business owes back the invested money to the investors.

Cash Flow Statement

The success of a business can be measured by its free cash flows. A cash flow statement indicates the 

  1. Cash Inflow: cash from sales, loans etc.
  2. Cash Outflow: cash paid to vendors, employees etc.
  3. Cash balance: Net off inflow and outflow

A positive cash flow means  cash coming into your business is more than cash going out. This denotes that your customers are paying on time and vendor gets paid on time. This is an ideal situation where  your business can run without taking on debt. As a business owner you must always have  an eye on the cash flow statement. It is imperative to have a positive cash flow.

Your business’s financial data will help you make informed, strategic decisions that maximize revenue and turbo charge your business’s growth. In order to stay ahead you need the best technology available. Zoho Books is a cloud based accounting software which has a dashboard which containing all the vital details of your business. Not just that there are tens of reports which you use to make informed decisions.

Of course, you need a combination of technology with human expertise. At Integra Books, we combine technology with the best experts to provide the best services. Get in touch today.

Quick Tips to Improve Cash Flow

by Sanjeev Archak Sanjeev Archak No Comments

Cash is King. There are no two ways about it. Effective cash flow management is one of the  the foundations of a business. How do you improve cash flow? In theory it is simple, increase your cash inflow and decrease the cash outflow. However, putting this formula into practice is easier said than done. Hence, managing your cash flows requires foresight.

We have explored the need for cash forecasting and budgeting in our previous post .In this post we will provide you with some pointers on how to improve cash flow :

1. Review of Costs

Review the costs being incurred in your business and formulate a budget for major expenses. Bench mark these expenses against a  previous period. Look for cost savings by looking for cheaper products and services.

2.Inventory Management

If you are a manufacturing business or a retail business then managing inventory must be a focus area. Categorise inventory into fast,slow and non moving items. Stocking fast moving items will lead to quick inventory to cash cycle and cut cash blocking in piled up stock. There are various inventory management tools available. We recommend Zoho Inventory.

3.Get paid faster by Customers

Make it easy for customers to pay you by using payment gateways. These integrate cloud based accounting apps and makes collections & reconciliation a breeze. Monitoring credit periods is a must to manage cash from customers. 

4.Price your products/services

It is important to price your products/services to maintain their perceived  value. Increase in sales prices will lead to positive cash flows whereas decrease in sales price may result in increase in sales volume thereby leading to increased cash flows. So these decisions should not lead to loosing customers or decreasing  sales. It is a fine line to tread.

5. Build a cash forecast

Cash forecast is a strategic decision making tool. Hence it is important to run forecasts at regular intervals, this could be monthly, quarterly or even annual. A forecast always gives you a heads up.

Get proactive with cash flows

Work closely with your accountant to do all this. A cloud based accounting software helps you to do this and much more for your business. 

Our experts at Integrabooks will advise you on your cash flow management and working capital which helps to streamline your finances and produce improved cashflow. Get in touch with us today!