OK. I guess you've had enough accounting for a while. What about actually running the business? How do you get the most bang for your business buck?
Let's start with the shop or main office part of your business. We'll take the example of a business making something for resale. We've talked about setting up the paperwork side of the business, now it's time for the hands-on part. You know you have to buy the materials and equipment. Think about the layout of the space and the workflow itself. What equipment has to be at the beginning of the process? I like cabinetry, so I have a shop set up. It's small, so location of everything is critical! The lumber comes in and will flow around and across the shop as the pieces are cut, sanded, assembled, finished and prepared for shipping.
If you're running a service, whether it's drywall finishing, insurance sales, or consulting, you will want to set up your primary work space with a work flow. The drywall finisher will store the necessary tools that will go out on the jobs in an accessible location to the area where they will be taken in and out for use. The insurance agent will plan a front-end customer service area, separate from the administrative area where business planning & record keeping is done. A consultant will have to take similar considerations, depending on the kind of consulting involved.
What do you need to operate? In the case of cabinetry, the key item is, of course, the lumber. Shopping around for the best prices for the quality you need is important. Quantity buying, payment terms and discounts are important. If your customers typically will be paying with delays, delaying your payment terms may be useful. Otherwise, you'll be expected to pay your bills within thirty days but you won't collect your money for maybe sixty days. That makes it tough to take discounts on invoices from your material suppliers. If you can't get extended payment terms, see what other concessions the vendor might be willing to make. As you learn options in dealing with a few of your biggest suppliers, see what you can use in approaching other suppliers as your business grows.
What will it take to have employees? Remember this: The payroll taxes have to be paid!!! Better to use the money to pay the taxes on time than to have to pay tax, penalty and interest later....especially when the penalty may not be deductible for tax purposes. The payroll will take a big bite out of what you were taking home when you were only paying yourself. You have less money, but it is a legitimate business expense - as well as the payroll taxes. If you have someone working for you at $10 per hour, you will need $400 plus Social Security and Unemployment taxes. With few employees, you can pay your payroll taxes quarterly. That means it will be easy to use that money for day-to-day activity and then not have it when it's time to pay the taxes you've withheld and the additional employer's share of payroll taxes.
More to come on this later. Keep in touch.
Gary
Friday, February 29, 2008
Friday, February 22, 2008
Equities: What you're worth
Equity - or capital - is the "big picture" of why you're working. When you finish your work and close the books, you want to see your equity bigger and better than you started.
In a sole proprietorship or partnership, it's simply seeing the total equity increase. If you're the owner, it's all yours. As a partner, usually there is, or at least, should be a partnership agreement that spells out the terms of which partner gets what portion of the business. Often, a 50/50 split is often difficult, for obvious reasons. Determining how to structure this will take advice from people you can trust and with plenty of experience with partnership relationships.
In the event you decide to incorporate, the equity of the business is represented in shares, or parts of ownership, of the company. A privately held company (as I recall from years ago) consists of 15 shareholders or less. If your goal is to develop your business into a company whose shares are traded on a stock exchange, you will get to the point of watching the value of your shares grow. The profits of a company are sometimes distributed to the shareholders. These distributions are called dividends. Any profits not distributed are referred to as retained earnings. By this point, you, as the owner, will more than likely be an employee. Consequently, the retained earnings aren't as significant for you personally. Instead, they will be important for your shareholders. Although you want to be able to issue dividends to them, you also want to be able to keep a portion of the profits in the company to keep the value of the stock itself high.
When an investor looks at the earnings of a business, he (or she) wants to see a good price-to-earnings ratio. I'm starting to get out of my area of expertise here, but other things an investor wants to see are a good dividend payment and a good return on investment. When a company pays dividends consistently and when it also has growth in its equities, the investor knows there is a good return on investment because the dividends are similar to interest earnings on a bank account and the increase in retained earnings adds to the value of the shares of stock the investor owns.
Grow the value of the business and you and your partners or investors will be happy.
Have a great weekend.
Gary
In a sole proprietorship or partnership, it's simply seeing the total equity increase. If you're the owner, it's all yours. As a partner, usually there is, or at least, should be a partnership agreement that spells out the terms of which partner gets what portion of the business. Often, a 50/50 split is often difficult, for obvious reasons. Determining how to structure this will take advice from people you can trust and with plenty of experience with partnership relationships.
In the event you decide to incorporate, the equity of the business is represented in shares, or parts of ownership, of the company. A privately held company (as I recall from years ago) consists of 15 shareholders or less. If your goal is to develop your business into a company whose shares are traded on a stock exchange, you will get to the point of watching the value of your shares grow. The profits of a company are sometimes distributed to the shareholders. These distributions are called dividends. Any profits not distributed are referred to as retained earnings. By this point, you, as the owner, will more than likely be an employee. Consequently, the retained earnings aren't as significant for you personally. Instead, they will be important for your shareholders. Although you want to be able to issue dividends to them, you also want to be able to keep a portion of the profits in the company to keep the value of the stock itself high.
When an investor looks at the earnings of a business, he (or she) wants to see a good price-to-earnings ratio. I'm starting to get out of my area of expertise here, but other things an investor wants to see are a good dividend payment and a good return on investment. When a company pays dividends consistently and when it also has growth in its equities, the investor knows there is a good return on investment because the dividends are similar to interest earnings on a bank account and the increase in retained earnings adds to the value of the shares of stock the investor owns.
Grow the value of the business and you and your partners or investors will be happy.
Have a great weekend.
Gary
Friday, February 15, 2008
Equity: The goal and purpose of business
The third and final part of the balance sheet is the equities, or capital, section. This will look different, depending on the structure of your business. Like I've mentioned before, The equities are the net result of everything else that occurs in your business during a period of activity, whether it's monthly, quarterly or yearly. As you generate sales, incur expenses and pay or get paid for these activities, the results impact your equity. Part of the closing of your books takes the net of income and expenses and moves it into equity. Some of the money you receive will pay down loans or accounts payable, buy assets or maybe get put into an asset. Maybe your sales went up but they were all charge sales. So...your receivables go up, an increase to assets. Maybe you didn't have to pay your 6-month insurance premium, so you still have some money in your bank account. When all of this activity is finalized for whatever reporting period you're looking at, the end result hits equity.
Remember the reason for the name "Balance Sheet". Assets must equal, or balance with, liabilities and equity. So, to follow a little bit of algebra (using an equation), Assets minus Liabilities must equal equities. Sometimes you will take money out of your business by way of the drawing account. This gets counted against equity. The final answer to all of these ups and downs throughout the month gets finalized to a "net equity" figure. This is how much your business is worth after everything else is wrapped up. The point to running a business is to see this figure grow. The result is that your net worth, or your partners' or your shareholders' stake in the business. In a sole proprietorship, this is called owner's equity. A corporation has shareholders' equity and retained earnings. Partners' shares are also separated by each partner's stake in the business. As any owner's or shareholder's value of the business grows, it is a return on investment.
This is the world of capitalism. The capital of a business is expected to grow. This is the reward for taking the risk of running a business or placing your money into it to help it grow. My commentary: The growth of capital is not only to benefit you, but also to be used for the good of others. When the U.S. uses its capitalist profits around the world for the good of those in need, it has done the right thing.
Go be a capitalist. Have a great weekend.
Gary
Remember the reason for the name "Balance Sheet". Assets must equal, or balance with, liabilities and equity. So, to follow a little bit of algebra (using an equation), Assets minus Liabilities must equal equities. Sometimes you will take money out of your business by way of the drawing account. This gets counted against equity. The final answer to all of these ups and downs throughout the month gets finalized to a "net equity" figure. This is how much your business is worth after everything else is wrapped up. The point to running a business is to see this figure grow. The result is that your net worth, or your partners' or your shareholders' stake in the business. In a sole proprietorship, this is called owner's equity. A corporation has shareholders' equity and retained earnings. Partners' shares are also separated by each partner's stake in the business. As any owner's or shareholder's value of the business grows, it is a return on investment.
This is the world of capitalism. The capital of a business is expected to grow. This is the reward for taking the risk of running a business or placing your money into it to help it grow. My commentary: The growth of capital is not only to benefit you, but also to be used for the good of others. When the U.S. uses its capitalist profits around the world for the good of those in need, it has done the right thing.
Go be a capitalist. Have a great weekend.
Gary
Thursday, February 14, 2008
Liabilities: owing to someone else.
Liabilities are grouped like assets. Those you can easily pay - or be demanded to pay - are called current (or short-term) liabilities. The most usual current liabilities are Accounts Payable - like the local office supply store, materials dealer for your type of business, etc. Equally as common are payroll and payroll tax liabilities. These are followed by notes or loans payable. Like with assets, these are usually scheduled for payoff within the coming year.
The next group of liabilities are long-term liabilities. Things like mortgages, extended term loans and similar things. One particular note about loans is that they are often separated into short-term and long-term parts. If $1,000 of a $10,000 loan will be paid off within the coming year, that $1,000 will be classified as short-term. The remainder will be shown in the long-term part of the liabilities. As the loan progresses, the short-term and long-term balances are adjusted to show realistic claims against your business. This may be done annually, quarterly or even monthly. The larger and more heavily you rely on financing for business operations, the more important it will be for these figures to be kept accurate. I am opposed to any more debt than necessary. Who do you want having a claim on your business? You or someone else you may not even know?
The last part of liabilities is the unusual or irregular items. In the case of a business that owes another business, transactions may be run through a "suspense account". This is an account that holds amounts due to or from one internal businsess to or from another internal business. Other uses for a suspense account would be items you owe somebody but are not "encumberances" to your business. For example, I issued a check to someone recently and the individual lost the check. Consequently, when I voided the check for re-issue, I increased my cash and a suspense account in the liabilities until I would replace the check. The new check would then reduce cash and the offsetting "other side of the entry" would reduce the suspense account as well. Suspense accounts can be asset or liability accounts. You can make that determination based on what you will be putting into that account as a general rule.
When you're starting a business, some of these things will be unnecessary. If you have questions about them, let me know & I can go into them in greater depth.
Until then, have a great day.
Gary
The next group of liabilities are long-term liabilities. Things like mortgages, extended term loans and similar things. One particular note about loans is that they are often separated into short-term and long-term parts. If $1,000 of a $10,000 loan will be paid off within the coming year, that $1,000 will be classified as short-term. The remainder will be shown in the long-term part of the liabilities. As the loan progresses, the short-term and long-term balances are adjusted to show realistic claims against your business. This may be done annually, quarterly or even monthly. The larger and more heavily you rely on financing for business operations, the more important it will be for these figures to be kept accurate. I am opposed to any more debt than necessary. Who do you want having a claim on your business? You or someone else you may not even know?
The last part of liabilities is the unusual or irregular items. In the case of a business that owes another business, transactions may be run through a "suspense account". This is an account that holds amounts due to or from one internal businsess to or from another internal business. Other uses for a suspense account would be items you owe somebody but are not "encumberances" to your business. For example, I issued a check to someone recently and the individual lost the check. Consequently, when I voided the check for re-issue, I increased my cash and a suspense account in the liabilities until I would replace the check. The new check would then reduce cash and the offsetting "other side of the entry" would reduce the suspense account as well. Suspense accounts can be asset or liability accounts. You can make that determination based on what you will be putting into that account as a general rule.
When you're starting a business, some of these things will be unnecessary. If you have questions about them, let me know & I can go into them in greater depth.
Until then, have a great day.
Gary
Tuesday, February 12, 2008
Assets: The first part of the Balance Sheet
Assets are the things you can identify as yours. These are the usual things like your cash account, things you buy and hold onto for later re-sale, buildings, furniture, tools, vehicles, etc. These assets are categorized as current, long-term or fixed assets. In addition to tangible things like these, there are intangible things like accounts receivable, notes or loans receivable, copyrights, goodwill (which may come with the purchase of a business), prepaid items like rent or insurance. Let's take a look at these in greater depth.
Current assest - assets that can easily be converted into cash - are also referred to as liquid assets. These usually are expected to have a life of six months or maybe up to a year. Checking and savings accounts, petty cash, accounts receivable, inventory, prepaid rent, prepaid insurances, investments, such as CD's or annuities, notes/loans receivable that will mature within the terms of a current asset and inventory are considered current assets.
Long-term assets are expected to have an extended life. If you loan a large sum of money to someone and give them several years to pay it off, the part that will be due beyond the current terms is considered long term. Goodwill, property such as artwork or maybe a valuable stamp or coin bought as an investment to be held for an extended amount of time, CD's or annuities with a maturity several years out, are considered long-term assets.
Fixed assets, sometimes known as plant assets, would be items that are part of your day-to-day functions. These will be the office furnishings, tools, vehicles, fixtures, A/C units, cars or trucks, computers, production machinery, construction equipment, etc. These are depreciated (reduced in value due to wear and tear) and assigned a new value. This is how it works. If you buy a desk for $1,000 and expect it to last five years, one fifth of the $1,000 is written off as an expense - reducing your taxable income. The expense is a debit, as we have seen previously, and the credit goes into what is called a "contra-asset" account on the balance sheet, called "Accumulated Depreciation". The combined total of the debit balance in the fixed asset account and the credit in the accumulated depreciation account combine to provide a net figure, demonstrating the net value of the assets you own. To complicate things, but to give you tax advantages, the IRS has multiple methods of calculating depreciation of various kinds of assets. These can be discussed at length with your bookkeeper, CPA or internal accountant.
One more thing...often a business owner or company will determine that many of the things that can be considered fixed assets will wear out well before a useful life is met. These items are often expensed immediately. Frequently, this company will determine a dollar value as a threshold to determine if an item will be considered a fixed asset or an expendable item. Depending on what you use in your business, you may want to do the same, setting the limint at $250, $500 or even $1,000.00. That way you won't have an excessive number of small value assets being depreciated over an extended life. This keeps your asset list - which should be relatively specific in its descriptions - smaller and saves substantial work when these small items have to be disposed of early.
Write back with questions. I'll look forward to hearing from you.
Gary
Current assest - assets that can easily be converted into cash - are also referred to as liquid assets. These usually are expected to have a life of six months or maybe up to a year. Checking and savings accounts, petty cash, accounts receivable, inventory, prepaid rent, prepaid insurances, investments, such as CD's or annuities, notes/loans receivable that will mature within the terms of a current asset and inventory are considered current assets.
Long-term assets are expected to have an extended life. If you loan a large sum of money to someone and give them several years to pay it off, the part that will be due beyond the current terms is considered long term. Goodwill, property such as artwork or maybe a valuable stamp or coin bought as an investment to be held for an extended amount of time, CD's or annuities with a maturity several years out, are considered long-term assets.
Fixed assets, sometimes known as plant assets, would be items that are part of your day-to-day functions. These will be the office furnishings, tools, vehicles, fixtures, A/C units, cars or trucks, computers, production machinery, construction equipment, etc. These are depreciated (reduced in value due to wear and tear) and assigned a new value. This is how it works. If you buy a desk for $1,000 and expect it to last five years, one fifth of the $1,000 is written off as an expense - reducing your taxable income. The expense is a debit, as we have seen previously, and the credit goes into what is called a "contra-asset" account on the balance sheet, called "Accumulated Depreciation". The combined total of the debit balance in the fixed asset account and the credit in the accumulated depreciation account combine to provide a net figure, demonstrating the net value of the assets you own. To complicate things, but to give you tax advantages, the IRS has multiple methods of calculating depreciation of various kinds of assets. These can be discussed at length with your bookkeeper, CPA or internal accountant.
One more thing...often a business owner or company will determine that many of the things that can be considered fixed assets will wear out well before a useful life is met. These items are often expensed immediately. Frequently, this company will determine a dollar value as a threshold to determine if an item will be considered a fixed asset or an expendable item. Depending on what you use in your business, you may want to do the same, setting the limint at $250, $500 or even $1,000.00. That way you won't have an excessive number of small value assets being depreciated over an extended life. This keeps your asset list - which should be relatively specific in its descriptions - smaller and saves substantial work when these small items have to be disposed of early.
Write back with questions. I'll look forward to hearing from you.
Gary
Friday, February 8, 2008
Looking at tax issues
As you can guess, there are plenty of things to know about the IRS's requirements and limitiations when it comes to self employment. The Schedule C is the sole proprietors business tax return. Your first adventure into filing your income taxes for your business will be daunting. This is the reason for so much planning when you prepare to start a business and as you run your business.
Most of what goes onto a Schedule C will be fed by the income and expense accounts you've set up based on some of my other posts. If you choose to prepare your own tax returns, it will be a good idea to check out the form for the most recent year so you can get a look ahead at what you will need to prepare to complete the form as smoothly as possible. The web site for the IRS will have the form you'll need. They come up with them; they ought to have them!!!
Two other items that will be important when you prepare your business tax return - sole proprietorship, partnership, corporation or whatever. One is depreciation. This is for calculating the devaluation of your fixed assets based on wear and tear, using a "useful life" in number of years. Don't miss this expense! When you have equipment or other property that wears out, depreciation will let you take advantage of this loss of value and you don't spend money for it. It also reduces your tax liability when it has been included.
The other thing to make sure to take advantage of is business use of your personal vehicle. If you can't afford a new vehicle right off the bat, using your personal car for business purposes is legitimate and will help you save some tax money. The annoying thing about this for a lot of people is due to the hassle of writing down the starting and ending mileage on your odometer so you can claim mileage expense. This is expense is a great benefit because the IRS allows you to claim 48 1/2 cents per mile for every business mile you use your personal car. 100 miles means $48.50 in expenses, reducing your taxable income. That makes it worth doing the paperwork!!
One warning: Keep your records of this expense. The IRS wants you to be able to prove your claims for use of your personal vehicle for busines purposes. The IRS Form 2106 & Form 4562 are used for depreciation and mileage expenses.
Well, the day is over. I have to quit for now. Keep in touch. Have a good weekend!
Gary
Most of what goes onto a Schedule C will be fed by the income and expense accounts you've set up based on some of my other posts. If you choose to prepare your own tax returns, it will be a good idea to check out the form for the most recent year so you can get a look ahead at what you will need to prepare to complete the form as smoothly as possible. The web site for the IRS will have the form you'll need. They come up with them; they ought to have them!!!
Two other items that will be important when you prepare your business tax return - sole proprietorship, partnership, corporation or whatever. One is depreciation. This is for calculating the devaluation of your fixed assets based on wear and tear, using a "useful life" in number of years. Don't miss this expense! When you have equipment or other property that wears out, depreciation will let you take advantage of this loss of value and you don't spend money for it. It also reduces your tax liability when it has been included.
The other thing to make sure to take advantage of is business use of your personal vehicle. If you can't afford a new vehicle right off the bat, using your personal car for business purposes is legitimate and will help you save some tax money. The annoying thing about this for a lot of people is due to the hassle of writing down the starting and ending mileage on your odometer so you can claim mileage expense. This is expense is a great benefit because the IRS allows you to claim 48 1/2 cents per mile for every business mile you use your personal car. 100 miles means $48.50 in expenses, reducing your taxable income. That makes it worth doing the paperwork!!
One warning: Keep your records of this expense. The IRS wants you to be able to prove your claims for use of your personal vehicle for busines purposes. The IRS Form 2106 & Form 4562 are used for depreciation and mileage expenses.
Well, the day is over. I have to quit for now. Keep in touch. Have a good weekend!
Gary
Wednesday, February 6, 2008
Expenses: How are you spending?
Expenses are where you spend your money. But, as with income, a lot of times you incur expenses without using cash. Now for another accounting term. Accrual. The accrual method of accounting is the tool that deals with these kinds of transactions. If you buy something at the local supply store and don't have to pay for it for 30 days or six months (same as cash!!), the expense (debit/increase) is recorded in your books for the day you bought it and then is put on "accounts payable" (credit/increase). When you finally do send your check to pay for the thing you bought, you will credit (decrease) cash and credit (decrease) accounts payable. This closes the circle leaving you with the expense of the item you bought and the payment from your cash account. Accounts payable was merely the means of keeping track of what you owed until you paid it. Accounts receivable and sales work the same way but the debits and credits are reversed.
Now we come to the rest of the expense picture. Expenses are accumulated until the end of the month and the totals are listed on the income statement or profit and loss statement (P&L). To manage your profitability and have better control of your spending, the P&L is broken into smaller segments. The first piece is your cost of operations. A great example is a construction company. The contract income earned is listed, naturally, at the top of the P&L. Next is the various expenses directly for the fabrication and installation of the project, whether it's an air conditioning unit for an office building or a back-up generator for a manufacturing facility. When I worked for a mechanical contractor, construction costs were grouped into equipment, materials, labor, subcontract, and other direct costs. The individual totals of these categories are added together and that figure is subtracted from total sales. The result is gross profit. The gross profit has to be enough to cover your administrative or overhead costs. Some businesses may have a large gross profit and a lot of overhead and administrative expenses. The mechanical contractor I worked for aimed for 15% as the gross profit target. From here, the goal was to cover overhead with 10% and have 5% remaining for net profit. This means that out of every $1.00 of income, only 5 cents were left for the business to buy new, more or better equipment. On $10 million, $500,000 was available for future projects or other future plans.
When the expenses are studied, it may be found that more cost-conscious buying in operating costs can yield a higher gross profit percentage. Then, tighter controls on overhead expenses could take net profit to 7%. Guess what!!! Now you have money for an enhanced marketing plan in the first half of the year, generating more sales in the second half of the year. Now you've grown your business, improved profitability and maybe started a profit sharing program for your employees.
One more step. This will come well before you hit $10 million in sales. As you evaluate your overhead expenses, you may find you have so much going into one big bucket that you don't know what it all means. This is the time to consider establishing separate departments. One thing not to do, though, is to have so many departments there is too much separation of duties. Something else is to avoid is changing your structure so often you and everyone else can't keep up with the unending change. Plan a structure that will have unique responsibilities by department and that will need to be changed only as your business grows. A simple example is not to start an IT department until you need to pass off the duties to an individual or group of individuals that can handle the duties without your intense supervision.
That's enough for today. Have a good one.
Gary
Now we come to the rest of the expense picture. Expenses are accumulated until the end of the month and the totals are listed on the income statement or profit and loss statement (P&L). To manage your profitability and have better control of your spending, the P&L is broken into smaller segments. The first piece is your cost of operations. A great example is a construction company. The contract income earned is listed, naturally, at the top of the P&L. Next is the various expenses directly for the fabrication and installation of the project, whether it's an air conditioning unit for an office building or a back-up generator for a manufacturing facility. When I worked for a mechanical contractor, construction costs were grouped into equipment, materials, labor, subcontract, and other direct costs. The individual totals of these categories are added together and that figure is subtracted from total sales. The result is gross profit. The gross profit has to be enough to cover your administrative or overhead costs. Some businesses may have a large gross profit and a lot of overhead and administrative expenses. The mechanical contractor I worked for aimed for 15% as the gross profit target. From here, the goal was to cover overhead with 10% and have 5% remaining for net profit. This means that out of every $1.00 of income, only 5 cents were left for the business to buy new, more or better equipment. On $10 million, $500,000 was available for future projects or other future plans.
When the expenses are studied, it may be found that more cost-conscious buying in operating costs can yield a higher gross profit percentage. Then, tighter controls on overhead expenses could take net profit to 7%. Guess what!!! Now you have money for an enhanced marketing plan in the first half of the year, generating more sales in the second half of the year. Now you've grown your business, improved profitability and maybe started a profit sharing program for your employees.
One more step. This will come well before you hit $10 million in sales. As you evaluate your overhead expenses, you may find you have so much going into one big bucket that you don't know what it all means. This is the time to consider establishing separate departments. One thing not to do, though, is to have so many departments there is too much separation of duties. Something else is to avoid is changing your structure so often you and everyone else can't keep up with the unending change. Plan a structure that will have unique responsibilities by department and that will need to be changed only as your business grows. A simple example is not to start an IT department until you need to pass off the duties to an individual or group of individuals that can handle the duties without your intense supervision.
That's enough for today. Have a good one.
Gary
Saturday, February 2, 2008
Income ....and income tax
You're up and running and bringing in money and spending it. How does all of this work with profit, my money and income taxes?
Income, as mentioned in other posts, is the money you earn from running your business. There is "regular income" and there is "other income". Regular income is the result of the routine activities of your business. Whether you're a car dealer, home builder, lawyer, garbage collector or software writer, the earnings from the core activities of your business are your regular income. Many times, you will have several things directly related to what you do. These will all fall under regular income. Other income is the result of out-of-the-ordinary activities. If you are a painter and, on rare occasion, you install some electrical wiring for someone, the electrical work would be other income. If you have some of the business money invested in a CD or longer term investment for later use, the interest earnings are other income. If you're in an accident with your business-owned car and it gets totalled, the insurance proceeds are other income.
So, I billed someone for 100 widgets but haven't gotten paid yet. What do I do? Unless you choose the cash basis of accounting (I prefer to avoid this) the sale is your income but, instead of having the money in your bank account, the money goes into accounts receivable. Accounts receivable are kept separately by customer. The total of all unpaid customer balances becomes the accounts receivable figure on your balance sheet. If you sold the widgets for $2.00 each, you will have $200 on accounts receivable (as a debit) and $200 in sales (as a credit). When you get paid the $200 by your customer, you reduce your accounts receivable (credit - offsetting the original debit, for an end result of zero on accounts receivable for that customer) and increase your cash account (debit) when you take the check to the bank for deposit.
One question that may come to mind is "What is the difference between revenue, income, sales and receipts?" The first three: sales, income and revenue, are pretty interchangeable, all representing your business earnings. Sales are the revenues/income directly from regular business activity or operations. Other items, like those I mentioned earlier, are still income or revenue, but since you didn't specifically try to earn them, they don't get classified as sales. Receipts are the payments you receive. Usually, they are for the sales you've made, but if you have income from other sources, those qualify as receipts as well.
Enough on money coming in. As you use this money, you reduce your profit. That's OK. I don't know of any business that is all sales with no costs. Not even gambling or robbing banks. You have to put money in to get money out. The profit is the part the IRS and state departments of revenue like. This is what is used to figure out your income tax. So, the challenge is to figure out how to keep your tax burden low while still having enough money at home for food, clothes & the mortgage. Expect to pay taxes. Plan for them and make the payments. BUT.....use every legal and practical opportunity to avoid paying taxes unnecessarily.
For a peek into another entry, here is an extra tool you will use to help you manage your business profits, expenses and taxes. When you setup your income statement, be sure to separate expenses directly related to how you earn your money (operating expenses) from your other expenses (overhead expenses). When you subtract your operating expenses from your sales, you are left with "gross profit". The amount - best measured as a percentage of sales - should be enough to cover your overhead expenses and still have enough profit to pay for you to live. The figure left after you have paid your overhead is your net profit which is where your "take home pay" comes from. Like I've said, when you take some profit home, be sure to plan some of it for paying your taxes.
That's all for today. Have a good weekend.
Gary
Income, as mentioned in other posts, is the money you earn from running your business. There is "regular income" and there is "other income". Regular income is the result of the routine activities of your business. Whether you're a car dealer, home builder, lawyer, garbage collector or software writer, the earnings from the core activities of your business are your regular income. Many times, you will have several things directly related to what you do. These will all fall under regular income. Other income is the result of out-of-the-ordinary activities. If you are a painter and, on rare occasion, you install some electrical wiring for someone, the electrical work would be other income. If you have some of the business money invested in a CD or longer term investment for later use, the interest earnings are other income. If you're in an accident with your business-owned car and it gets totalled, the insurance proceeds are other income.
So, I billed someone for 100 widgets but haven't gotten paid yet. What do I do? Unless you choose the cash basis of accounting (I prefer to avoid this) the sale is your income but, instead of having the money in your bank account, the money goes into accounts receivable. Accounts receivable are kept separately by customer. The total of all unpaid customer balances becomes the accounts receivable figure on your balance sheet. If you sold the widgets for $2.00 each, you will have $200 on accounts receivable (as a debit) and $200 in sales (as a credit). When you get paid the $200 by your customer, you reduce your accounts receivable (credit - offsetting the original debit, for an end result of zero on accounts receivable for that customer) and increase your cash account (debit) when you take the check to the bank for deposit.
One question that may come to mind is "What is the difference between revenue, income, sales and receipts?" The first three: sales, income and revenue, are pretty interchangeable, all representing your business earnings. Sales are the revenues/income directly from regular business activity or operations. Other items, like those I mentioned earlier, are still income or revenue, but since you didn't specifically try to earn them, they don't get classified as sales. Receipts are the payments you receive. Usually, they are for the sales you've made, but if you have income from other sources, those qualify as receipts as well.
Enough on money coming in. As you use this money, you reduce your profit. That's OK. I don't know of any business that is all sales with no costs. Not even gambling or robbing banks. You have to put money in to get money out. The profit is the part the IRS and state departments of revenue like. This is what is used to figure out your income tax. So, the challenge is to figure out how to keep your tax burden low while still having enough money at home for food, clothes & the mortgage. Expect to pay taxes. Plan for them and make the payments. BUT.....use every legal and practical opportunity to avoid paying taxes unnecessarily.
For a peek into another entry, here is an extra tool you will use to help you manage your business profits, expenses and taxes. When you setup your income statement, be sure to separate expenses directly related to how you earn your money (operating expenses) from your other expenses (overhead expenses). When you subtract your operating expenses from your sales, you are left with "gross profit". The amount - best measured as a percentage of sales - should be enough to cover your overhead expenses and still have enough profit to pay for you to live. The figure left after you have paid your overhead is your net profit which is where your "take home pay" comes from. Like I've said, when you take some profit home, be sure to plan some of it for paying your taxes.
That's all for today. Have a good weekend.
Gary
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