What To Do With These Financial Statement Red Flags

As a business owner, you need to take the time to review your financial statement. While you may not possess an uncanny ability to spot red flags in an instant, gaining a basic understanding of your financial statements is enough. This way, you will easily identify any discrepancy that can create a negative effect on the financial health of your business.

Incomes that are non-operating

If you want to earn the trust of your creditors and investors, they need to see consistent income in your financial statement. The income must be from continuing operations. However, if income is obtained from other sources such as one-off sales, gains from the sale of investment and gains from the sale of fixed assets, this should be a cause for concern.

These revenues are considered non-operating and may not be valuable because the possibility that this revenue will not reoccur is strong. You can identify non-operating income as it is stated separately from operating income. It is found on the income statement. If the operating income decreases, this only means you should double your efforts into revenue sources that will not disappear.

Low Cash Flow Patterns

A profitable business does not mean having enough cash. A company needs to make sure that the cash is also flowing into the business to gain the confidence of investors. If you are falling behind your loan repayments or not collecting receivables quickly, it only means that you have poor cash flow patterns. When it comes to spotting cash flow patterns, pay attention to net income. If the net cash flow is low compared to net income, this can be another sign of a financial crunch.

Fixed Assets Disposal

It might be necessary to sell equipment every once in a while especially when it is not performing well, but if you used the cash for short-term expenses or to pay your debts, this can be a warning sign. The only exception is when the proceeds are reinvested into the business. Disposals of fixed assets can be an obstacle to your operating revenue. Disposals are found on the balance sheet. It is necessary for a business owner to be aware of the reason for selling the fixed assets. The disposals need to be significant and that said, an explanation of the reason for selling the fixed assets must be prepared.

Increasing Inventory

An increasing inventory may mean two things: you are expanding your offerings or you have products that are not selling. If the latter is the reason for the increasing inventory, there is a higher risk of spoilage. Make sure your inventory percentage is not higher than the prior years as this only denotes that you still have some inventory sitting on your shelf.

Tax Deductions Your Business Might Have Overlooked

Even in businesses, old habits die hard and when left unchecked, they can create a ripple effect on the most critical area of your business. When running your business, you need to see to it that you are sharper and smarter. The expenses you incur is often claimed as deductions. However, deductions for domestic or private expenses are not considered valid for claims. There are also some other expenses that are excluded. This is why you need to check the following as you may have overlooked them come tax time:

Prepay Expenses

Prepaying your expenses is one reason for overlooked tax deduction. Prepaying your expenses can be done to cover a time-frame, which should not exceed more than one year. The purpose of prepaying expenses is to bring forward your operating expenses before each financial year ends. Some examples of expenses you can prepay are insurance, training events, travel expenses, rent, phone and others.

Employee Deductions

Your employees’ salaries, bonuses, wages and even commissions taking place before the end of each financial year can be deducted. This can be done even if you have not physically made the payment to your staff by that date. The said payment still counts as work performed within the specified financial year despite the wages and salary not appearing in the PAYG payment summary of the employee until the next financial year.

Accounting and banking expenses

Bookkeeping, accounting and activity statement preparation are considered the most common deductions you make when running your business. Common deductions may also include marketing and general advertising costs. However, bank fees and charges are still overlooked.

Stock and Inventory

Everything counts with tax deductions and with that said it is important to check your stock and determine which ones are damaged or obsolete. Make sure you write it off or write it down because this practice will create a great impact on the trading stock’s value and your profit margins. Make sure you consider how to value your stock trading every financial year because there might be a possibility that you will be entitled to a tax deduction especially when your opening stocks have already exceeded the closing stock.

Bad Debts

Bad debts and financial loss can also be overlooked. As much as possible, you should speak to your financial advisor so you can discuss the steps you need to take to minimise the impact of the loss. Make an attempt to recover bad debts. You can also document the debt as evidence and your financial advisor can help you with the process.

It is imperative that you keep track of the tax laws and regulations as they change frequently. You can prevent issues with filing your tax claims if you aware of these changes.

Three Financial Statements You Should Get From Your Bookkeeper

Bookkeeping may not be a business owner’s forte, but you still need to learn the ropes because the most important aspect of your business is at stake. When your finances are left unchecked, you can join the growing number of failed businesses due to the lack of knowledge in bookkeeping. While bookkeepers and accountants are the only ones that can survive number crunching, you can still prevent bookkeeping mishaps, but gaining basic understanding of how the system works. If you are completely clueless about the bookkeeping system, your head will be in the clouds every time you are presented with a pile of financial statements because all of which will look and sound Greek to you.

Start With The Basics, Know Your Financial Statements

Income Statement
If you want to get an overview of your business’ profit and loss, the income statement is going to be your guide. Your bookkeeper presents the losses, net profits and sales revenue for the current period. You will also get the details of your expenses from this statement. The net profit or net loss is taken from the difference between the income and the expenses. A net profit is always good news to business owners.

Cash Flow Statement
If you wish to find out about your asset’s movement over a period of time, the Cash Flow Statement will give you the details you need. The statement has several categories: financing, operating and investing activities. The financing activities have to do with generating or paying debt. The operating activities refer to the tasks your business performs on a regular basis including making a sale. The investing activities are the purchase and sale of assets and buying a new location is a perfect example.

Balance Sheets
The balance sheets are important to bookkeepers and business owners because this is where profit and loss are demonstrated. While the balance sheets do not necessarily reflect specific investments of business owners, it is a good way to determine the available money. The balance sheets can also be used for predicting which direction your business is heading. They are known as the building block of bookkeeping and accountants refer to this statement in creating or analysing data.

The Balance Sheets Have Three Elements:

•    Assets refer to the business-controlled items. Cash and machinery are examples.

•    Liabilities are the items that a company owes. Loans are an example of liabilities.

•    Equity is the capital left after the assets have been utilised for paying off liabilities.
Bookkeepers and accountants also refer to these financial statements to provide recommendations. This way, a business owner will have an idea whether the business is still profitable. Business owners may sit down with the bookkeeper to discuss these financial statements.

What A Bookkeeper Should Secure Before The Weekend?

A bookkeeper is vital to every business because they know where the business stands financially. Business owners need a bookkeeper for a number of reasons such as keeping track of finances, but they must also understand their business so they will know the essential documents that a bookkeeper must regularly present. Some of the essential information that your bookkeeper should know are the profitable client, the most profitable service or product line and the cash flow. Your bookkeeper may be rushing to carry out a task before the end of the week and may not have the time to discuss some details with you. Before you let your bookkeeper off the hook, you need to set aside at least 30 minutes so they can give you an update of your financial standing.

Things you need to discuss with your bookkeeper:

•    Weekly Cash Flow Analysis – Although there are some aspects of bookkeeping that accounting software can take care of, a bookkeeper needs to deal with cash flow analysis and present financial statements to business owners in vivid details. This way, it will be easy for a business owner to understand where the business is going. Detailed cash flow projections will also help you determine payments for BAS and Superannuation.

•    Weekly Bank Reconciliation – At the end of the week, your bookkeeper should also present your reports, which are related to your bank transactions. Make sure the bookkeeper presents up to date reports or it will be meaningless. You can determine if there are fraudulent transactions if you keep a weekly bank record. Your bookkeeper should be able to record all of the bank transactions that have taken place on a weekly basis. Aside from bank reconciliations, your bookkeeper should also have a weekly report for credit card reconciliations.

•    Weekly Revenue and Margin Analysis – A detailed net profit analysis is important so you can easily track your revenue and gross margin. Your bookkeeper should show you a weekly Work in Progress report.

Why is it necessary for a bookkeeper to secure these reports?

Knowing what is going on with your business on a regular basis will help you identify some measures you need to take in case your business heads in the wrong direction. If you already have an idea that the financial aspect of your business is doing well, you will no longer have to worry about taking some drastic measures. You can immediately put a stop to fraudulent transactions if you make it a habit to check reports on a weekly basis or whenever necessary.

Although it is the bookkeeper’s job to keep financial reports in check, business owners must also take part in ensuring that the reports are correct. A business owner must understand the details that a bookkeeper providers. If you have a nagging suspicion that something is wrong with the reports, you should ask your bookkeeper for an explanation so you will know if you need to reassess your business. It is easy to lose track of your finances if you are attending to other business concerns, but bookkeeping should never take a backseat if you do not want to join entrepreneurs whose business has failed due to poor bookkeeping habits.