Accurate financial record-keeping is essential for businesses to comply with tax regulations, and proper bookkeeping is the key to achieving this. However, in addition to meeting legal obligations, good bookkeeping also provides several practical benefits that can help a business succeed. Here are some reasons why maintaining good bookkeeping is crucial for the success of a business:
Payroll costs represent the expenses incurred by an employer in fulfilling its obligations to employees. These expenses cover the compensation paid to employees for their direct labor, as well as mandatory benefits required by legal regulations. Together, these components form the accrued expense of keeping an employee on the payroll. In accordance with accounting principles, all accrued expenses must adhere to the matching principle, which dictates that expenses should match the period in which related revenues are reported, regardless of the payment date. For instance, if an employee is hired in December but paid in January, the labor expenses must be recognized in December.
It's worth noting that compensation for employee labor is not always recognized as an expense. In cases where employee labor is utilized in manufacturing a product or asset, the compensation, including provisions, should be recorded as a cost of producing the product or asset and recognized as an expense when the inventory is sold through the cost of sales.
Performance obligations refer to the withholdings or deductions made from employees' wages, which are not paid directly to employees but rather to government institutions or private companies at a later date. The most common withholdings in accordance with US laws are:
Other withholdings include:
Once a company has set up its employee hiring process and gathered all relevant employee information, it needs to follow these steps:
Generate payments: After calculating and recording accounting entries, companies need to generate payments to employees, government entities (related to withholdings), and other entities. This process may often be outsourced to third parties such as Ceridian
Calculate posterior adjustments to provisions: Due to the nature of provisions, which are based on estimates, it is important to recalculate and adjust provisions if necessary
Why is cash flow projection important?
A business relies on cash flow to function, and negative cash flow, in the long run, can cause various issues for a business. Although most businesses encounter cash flow problems at some point, planning ahead can make managing negative cash flow easier. Cash flow projections can aid in this planning process.
Business owners often mistakenly assess their business's health by focusing on assets, intellectual property, and other factors that are important for attracting investors or selling the business but are not useful in predicting future performance. These factors are also not considered in cash flow calculations.
1. Gain a better understanding of your business finances
Small business owners often struggle with maintaining a positive cash balance due to unexpected expenses and bills. Understanding where your money is going and identifying consistent causes of negative cash flow is crucial for long-term business growth. Conducting a cash flow analysis and projection helps you predict future cash inflow and outflow, allowing you to make informed decisions on where to invest or save your money.
2. Make confident business decisions
Insufficient cash flow can lead to poor business decisions, according to a QuickBooks survey. Cash flow projections provide actual data on how your business is performing, which helps you make informed decisions on when to invest in new opportunities or put money aside. If the coming month looks positive, there may be no need to postpone investments even if you are currently experiencing negative cash flow.
3. Build trust and credibility
Investors, lenders, and other stakeholders need to know that your business is financially stable. Cash flow statements and forecasts provide insight into your business's current and future financial health, which can help you secure a business loan, attract investors, win new business contracts, or make your company more attractive to potential buyers.
4. Plan for the unexpected
While cash flow projections cannot predict unforeseen events, they can help you prepare for them. Identifying when your business is most cash flow positive is an ideal time to put aside extra savings in an emergency fund. This can provide a cushion in case of unexpected expenses or dips in cash flow, preventing negative cash flow from derailing your business growth.
Unpaid invoices are a common problem for businesses, but with regular cash flow projections, you can anticipate when outstanding payments are likely to stack up. By identifying potential issues ahead of time, you can take proactive measures to prevent negative cash flow, such as offering early payment incentives or increasing communication with clients. Automated tools can help generate accurate cash flow forecasts without the need for manual calculations or spreadsheets.
To understand cash flow projections, it's important to first understand what cash flow is. Cash flow refers to the movement of money in and out of your business, and healthy cash flow is crucial for business success. By creating a cash flow projection, you can estimate the money you expect to flow in and out of your business, including income and expenses, over a specified period of time. This allows you to predict cash shortages and surpluses, estimate the effects of business changes, and demonstrate your ability to repay loans to lenders.
While cash flow projections can be a valuable tool for managing cash flow, they may not be suitable for every business and can be time-consuming and costly if done incorrectly. It's important to remember that cash flow predictions are not always perfect, but they can help you make informed decisions about your business and identify areas for improvement. Overall, cash flow projections provide a clearer picture of your business's financial health and can help guide your decision-making for the future.
1. Income statement
The income statement is typically the first place investors and analysts look when evaluating a business's financial performance. It presents the business's revenues and expenses for a specific period, starting with sales revenue at the top. From there, it deducts the cost of goods sold (COGS) to determine gross profit. Other operating expenses and income are then factored in to arrive at the bottom line, which represents the business's net income
2. Balance sheet
The balance sheet provides a snapshot of a company's financial position at a specific point in time. It lists the company's assets, liabilities, and shareholders' equity, with assets equaling liabilities plus equity. The asset section begins with cash and equivalents, which should match the balance found at the end of the cash flow statement. The ending balance of each major account is displayed from period to period. Net income from the income statement flows into the balance sheet as a change in retained earnings (adjusted for dividend payments).
3. Cash flow statement
The cash flow statement takes net income and adjusts it for any non-cash expenses. It then calculates cash inflows and outflows using changes in the balance sheet, displaying the change in cash for the period as well as the beginning and ending cash balances. It is divided into three sections: cash from operations, cash used in investing, and cash from financing.
As previously discussed, the three financial statements are interconnected, and financial models utilize the correlations between the information in these statements, as well as historical data trends across periods, to predict future performance. While the process of preparing and presenting this information can be intricate, typically the following steps are followed when constructing a financial model.
CHY offers a variety of tax-related services.
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