Financial accounting for your business involves reading and understanding financial reports and using helpful guidelines to deal with accounting needs. As a business manager, you can use the following information to gain confidence and speed with your business's financial accounting.
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Financial Report Roadmap
Taking care of the financial accounting for your business means knowing how to (and who should) read the financial report. This list of questions and answers is a guide for finding accounting information on a financial report and how to interpret the financial data.
Q: Who should read the financial report of a business?
A: Its internal managers and its external investors and lenders. The standard-issue financial statements in the financial report are designed with external users in mind.
Q: Where do I find the bottom-line profit made by a business?
A: In the last line in the income statement, which summarizes the sales revenue, income, expenses, and losses of a business for a quarter or year. The amount of bottom-line net income depends, to some extent, on whether the business chooses conservative (cautious) or liberal (optimistic) accounting methods for recording its sales revenue and expenses.
Q: Where do I find the summary of a business’s assets and liabilities?
A: In the balance sheet, which also reports the sources of its owners’ equity. The dollar amounts reported in a balance sheet reflect the historical transactions of the business. The sales revenue and expenses in the income statement propel many of the assets and liabilities in the balance sheet.
Q: How can I find out whether a business has a healthy cash flow?
A: Read the business’s statement of cash flows. To learn the cash flow generated from making profit, look in the first section of the statement of cash flows. Never forget: Sales revenue and expenses in the income statement are not cash flows; the income statement is the wrong place to find cash flows.
Q: Are the bottom-line profit and other key numbers in the financial statements I’m reading objective, above-board, and trustworthy?
A: There’s a fair chance that the business has, within tolerable limits, manipulated the amounts reported for its sales revenue and expenses and for certain assets and liabilities, which is generally called massaging the numbers. Savvy investors and lenders know about this process and treat the numbers accordingly. But investors and lenders do not tolerate accounting fraud (also called cooking the books), which refers to deliberate falsifications and gross distortions.
Q: Does its balance sheet tell me what the business is worth?
A: The short answer is no, but read on. The market price of a business, or its stock shares, depends mainly on its predicted profit performance in the future. Its income statements over the recent past are the basis for forecasting its future profit performance. Its balance sheet reports the assets the business uses to earn profit and the liabilities it is saddled with. A strong balance sheet helps the market value of a business, and a weak balance sheet hurts market value.
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Accounting Tips for Business Managers
As business manager, you’re in charge of your business’s accounting needs, which involves figuring out financial statements and preparing and using financial reports. Keep these useful accounting tips in mind:
You need a smartly designed P&L (profit and loss) report that serves as a practical tool for managing profit. The external income statement does not serve this purpose well. A good P&L report highlights the key variables that drive your business’s profit performance. The basic P&L template should be adapted to fit each profit center in your business.
*A good P&L report focuses on margin, sales volume, variable expenses, and fixed expenses. Margin equals sales price minus product cost and minus the variable expenses of making the sale. Your business must sell enough volume to earn total margin equal to fixed expenses before breaking into the profit zone. After your business reaches its break-even point, the margin from additional sales goes entirely to profit (before income tax).
*Relatively small changes in profit factors can yield dramatic results. A small slippage in margin per unit can have a devastating impact because unit margin is multiplied by sales volume. On the other hand, a slight boost in sales price or a little more sales volume yields a lot more profit.
*You must clearly understand every cost figure you use. Many costs depend on which accounting method is used, such as the choice between the last-in, first-out (LIFO) and the first-in, first-out (FIFO) methods, or they depend on rather arbitrary allocation methods. Know how your costs are calculated!
Be proactive in choosing the accounting methods for your business and designing accounting reports. All too often business managers adopt the policy that accounting is best left to the accountants. You don’t ever want to be in doubt about your own financial statements and internal P&L reports.
*Establish and enforce strong internal controls. Businesses handle a lot of data and money, which present countless opportunities for errors and fraud. Make sure bulletproof internal controls are in place and working. If your internal controls are weak, someone may steal some of your hard-earned profit.
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Source:http://www.dummies.com/how-to/content/accounting-for-dummies-cheat-sheet.html
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