Pilot Financial Webinar Class I. September 19, 2018

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Robyn Webster
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1 Pilot Financial Webinar Class I September 19, 2018

Bernoulli Finance assists mission-positive ventures with financial planning, analytics, and operations.

2 About Us Olivia Tincani provides business, financial, and strategic planning and technical assistance for small-scale independent farms, ranches, food businesses, and the organizations that serve them. Bernoulli Finance assists mission-positive ventures with financial planning, analytics, and operations. Our clients span multiple sectors with a deep focus on focus on food and beverage, ranging from farming to sales & service.

3 Outcomes of this class» Get comfortable with basic financial terminology / lingo Understand financial statement structures and components Begin to use your own financial statements to help with decision making Start exploring (or more deeply explore) accounting systems/software to help take some of the administrative burden off yourselves «

4 Cash vs Accrual Accounting Two different methods used for bookkeeping and reporting The difference between the two is all about timing

5 Cash Accounting» Recognize revenue when you receive cash from a customer Recognize an expense when you pay cash for a service or item «PROS CONS Simple to maintain Easy to understand when a transaction has occurred Easy to track how much cash is in hand at any given time Not taxed until the money is in the bank Less reliable, not holistic approach Sales may seem lower than they are (if waiting on bills to be paid) or higher than they are (if receiving deposits in advance) Hard to track what you owe or are owed

Accrual Accounting» Recognize revenue when you earn it, regardless of when the customer pays this may trigger Accounts Receivable or Unearned Revenue

provided this may trigger Accounts Payable or Prepaid Expenses «PROS CONS More accurate view of financial performance, leading to better long-term planning

6 Accrual Accounting» Recognize revenue when you earn it, regardless of when the customer pays this may trigger Accounts Receivable or Unearned Revenue Recognize production costs when revenue is made prior to that, they are accounted for as Inventory Recognize expenses when an item is ordered or a service is provided this may trigger Accounts Payable or Prepaid Expenses «PROS CONS More accurate view of financial performance, leading to better long-term planning Easy to track outstanding payables and receivables Requires more work and attention to detail Easy to lose sight of cash flow if not specifically paying attention to it

7 Cash vs Accrual Accounting, which should I use?» It depends on the way your business operates and its size «use ACCRUAL if Cash flows are not immediate i.e. receivables, payables, inventory play a role in your business You are actively planning for growth in your business use CASH if You have a lifestyle business that operates at a micro level * Either way, check in with your tax accountant to determine which method of accounting (and tax filing) is more beneficial at your current stage of business.

8 Chart of Accounts The Chart of Accounts (CoA) is the list of account categories (and sub-categories) used to classify all the transactions that enter your accounting system. These accounts form the blueprint of your financial statements. Why is the CoA so important? It forms the foundation of all financial reporting, both for historical and projected performance It relays the story of your business to insiders and outsiders A poorly designed CoA is the root of confusing financials A well thought out CoA can keep you and your team engaged and allow accurate business interpretation

9 The five main sets of accounts in your CoA are: Chart of Accounts 1. Revenue = income earned by the company 2. Expenses = expenses incurred by the company to generate that income, these include both Cost of Goods Sold (COGS) & Operating Expenses Building blocks of the company s Profit & Loss or Income Statement Indicates business performance and profitability (loss) over a period of time 3. Assets = owned by the company 4. Liabilities = owed by the company 5. Equity = Assets Liabilities i.e. what you own less what you owe Building blocks of the company s Balance Sheet Snapshot of the company s health (or state of being) at a moment in time

10 Optimizing your CoA some tips!» Don t just go with the default structure, modify it to suit your needs Create an order of accounts based on priority Purge small $$ accounts to minimize noise and complexity Define your categories and use them consistently => garbage in is truly garbage out Review your CoA periodically to clean up as necessary «

11 Cash vs Accrual Accounting - Homework Let s consider a month of business operations, September 2018: Revenues: 1. You receive $500 as a deposit for a product you have to deliver in November 2. You receive another $1,000 for a product you delivered to a customer today 3. You send an invoice for $750 for product shipped to a customer last week Expenses: 1. You spent $850 in August on the raw materials required for #2 and #3 above 2. You are spending $200 on raw materials required for #1 3. You paid $600 towards rent and utilities for September during the first week of the month 4. You ve received a bill for $250 in insurance costs for September Question: What is your net income using cash basis and accrual basis?

12 Financial Statements What are they?» Reports that detail the financial performance of a company. They relay the output resulting from your input of all financial transactions in your Chart of Accounts «Profit & Loss (P&L) or Income Statement A summary of all operational activity (revenues and costs) a business undertakes over a period of time Balance Sheet A snapshot of what the company owns and owes at a point in time. The difference between the two is business equity Cash Flow Statement A summary of how much cash your business generated and spent over a period of time

13 Profit & Loss Statement Revenue Cost of Goods Sold = Gross Profit Gross Margin = Gross Profit / Sales Operating Expenses = EBITDA or Operating Income Operating Margin = Operating Income / Sales Depreciation/Amortization (non-cash expense) = EBIT or Profit before Taxes Interest Expense & Taxes = Net Income Net Operating Margin = Net Income/Sales

14 Income Statement - Revenue Revenue: Income earned from the sale of a service or product Gross Revenue - Discounts / Promos - Refunds & Returns + Other Income (not associated with core business) Net Revenue

15 Income Statement - Expenses COGS: Direct or variable expenses incurred in production and grow (more or less) proportionally with revenue, may include: Ingredients / Raw Materials Packaging Shipping & Delivery / Transport Merchant Service Fees Equipment Rental Production Labor / Costs * Best Practice: Match COGS to the expected sale (accrual accounting!) * Gross Profit per Unit = Revenue per Unit COGS per Unit Must be Positive!

16 Income Statement - Expenses Operating Expenses: Ongoing or fixed costs of running the business, includes but may not be limited to: Sales & Marketing Costs Occupancy Costs Management & Administrative Payroll Travel & Entertainment Supplies & Tools Operating Income or EBITDA (Earnings Before Interest, Tax, Depreciation, Amortization) = Gross Profit Operating Expenses Often negative in the early years of business, ideally turning positive before cash flow runs out

17 Income Statement - Expenses Other Expenses: Expenses typically added back to determine business cash flow and valuation. Non-cash annual deduction of larger expense items that are used over multiple years: Depreciation: the wear and tear of tangible or physical assets Amortization: the wear and tear of intangible assets Interest: the cost of borrowing money Taxes including federal, state, and city taxes paid on business profits (earnings before taxes) Your tax accountant may try to minimize this number to lower taxes, but this is not always a good thing!

18 Balance Sheet Why is it called a Balance Sheet? ASSETS LIABILITIES = EQUITY Where equity is indicative of the book value of the company. * How does this differ from market value?

19 Balance Sheet - Assets Assets: Tangible or intangible items owned by the company Current Assets: assets that can be converted to cash within a year. Listed in order of liquidity on the balance sheet. Most commonly include: Cash: As liquid as it can get Accounts Receivable: Outstanding invoices to customers for earned sales Inventory: Raw materials, work-in-progress, and finished goods. As sales are made, inventory is depleted and expensed as COGS on the Income Statement Prepaid Expenses: Items or services paid for in advance but not yet consumed e.g. annual insurance payment for the upcoming year

20 Balance Sheet - Assets Long-term Assets: Also called Fixed Assets, these are relatively significant purchases such as equipment, real estate, etc. that have a useful life of more than one year. May include: Real Estate: Land and buildings used for business operations Equipment and Vehicles: Production and storage machinery, trucks Leasehold Improvements: Permanent changes to business property (construction, tiling, flooring, etc.) Furniture and Fixtures: Large movable items such as rack shelving, barn lighting, office furniture * Long-term assets are recorded in the books at original cost of purchase, not at fair market value. * Tangible long-term assets are expensed in installments on the Income Statement as Depreciation.

21 Other current or long-term assets may include: Balance Sheet - Assets Short- or long-term Notes Receivable: Money lent to a third party that might be returned within the year (current) or over a longer time frame (long-term) Tax Refunds: Money owed by the state or federal entities for taxes overpaid Security Deposits: Deposits towards rental space or equipment Intangible Assets: Investments in trademarks, patents, branding Investments in another entity

22 Balance Sheet - Liabilities Liabilities: Payments or debts owed by the company. Primarily of two types, current and long-term Current Liabilities: Payments owed within a year. Generally listed within order of payment immediacy on the balance sheet. Most commonly include: Accounts Payable: Outstanding bills from vendors or suppliers for received services or goods Notes Payable: Money owed in upcoming 12 months including lines of credit, credit cards, other short-term debt, or investor notes Sales Tax Liabilities: Payments of sales tax collected Salaries Payable: Compensation owed to employees for work done Unearned Revenue: Deposits made in advance by customers for services or products from the company, example CSA shares or prepayments for the CSC program

23 Balance Sheet - Liabilities Long-term Liabilities: Debts to be paid over multiple years or in over a year. Most commonly include: Mortgages: Loans that fund real estate purchases (the owned real estate is an asset) Equipment Leases: Loans that fund equipment purchases (the owned equipment is an asset) Officer / Friends & Family / 3rd Party Loans * Unless differently structured, most loans are repaid with monthly loan payments that include: - Principle Component: Principle payments are reflected in the Balance Sheet and lower the loan amount - Interest Component: Interest payments are reflected in the Income Statement

24 Cash Flow Statement Connects the P&L and Balance Sheet to provide real-time cash flow in a given time period Allows determination of cash burn and runway How much cash are you burning through each month How many months of cash does the business have left? Indicates how cash management can be improved Accounts Receivable / Payable Timing Determine and plan for funding needs Beginning Cash + / Cash from Investing Activities (usually from Balance Sheet) + / Cash from Operating Activities (usually from Income Statement) + / Cash from Financing Activities = Ending Cash

25 Using Your Information Accounting Checklist Daily: Know exactly how much cash you have available for business operations Weekly: Record business transactions Review unpaid bills, pay vendors on timely basis Create and send invoices to customers Review projected cash flow for the week based on business operations, cash inflow and outflow

26 Using Your Information Accounting Checklist Monthly: Reconcile your accounting records against your bank & card statements Review inventory status including speed of movement, allowing for restocking or preventing spoilage Follow up with customers on overdue invoices Review Income Statement for month s performance Compare against budget (if you have one) Compare against the same time period in previous years Review Balance Sheet to ensure balances are reasonable Compare against balance sheet from same period in previous year Compare against balance sheet from past periods (months, quarters) Review cash flow expectations and revise if needed based on past month performance

27 Selecting an Accounting System QuickBooks Online Cloud version of widely used small business accounting software Multiple versions depending on specific business needs Costs parallel to similar cloud accounting software Well known and understood by bookkeeping consultants easy to source help if needed First choice (usually) in accounting software for all related small business applications that require or run better with integration Useful next steps: QuickBooks Pricing - QuickBooks How it Works - QuickBooks Online Tutorials -

28 Thank you!

Engineering Economics and Financial Accounting

Engineering Economics and Financial Accounting Unit 5: Accounting Major Topics are: Balance Sheet - Profit & Loss Statement - Evaluation of Investment decisions Average Rate of Return - Payback Period