Does Business Math and Accounting stress you out? Learning the numbers of your business is important and it will take your business to the next level. Jeremias Ramos, CPA discusses Business Accounting Fundamentals and explains 4 Financial Documents that entrepreneurs can use to grow their business. Watch this video.
What are the real reasons for why an entrepreneur should have income projections when they can not accurately predict the future?
Jeremias Ramos, CPA: Creating a pro forma income statement is probably one of the most important things you have to do before starting a business. When you project your income, you see all the non-financial metrics that you need to hit. So then when you walk down the pro forma income statement you can see necessary items such as:
what are my expenses going to be,
how many employees do I need, and
how much traffic am I expecting.
This allow entrepreneurs to actually predict whether or not they’re going to be profitable. So, during the course of the first year or the first two years of your business, you can see if you're hitting those metrics, selling the right number of products, keeping your cost in line, whether or not you should move locations, or you should make improvements.
So proforma is probably the first financial statement that you're going to make before even considering about opening a business.
Outside of showing the profit of a business, what does a profit and loss statement show?
Jeremias Ramos, CPA: A profit and loss statement is one of the main financial statements that every business needs. It gives business owners a range of time that they can see all of the income and expenses. It's categorized in such a way that a business can take a look at the profit and loss statement, and see if they're profitable for the year. Business owners can then pick out certain key metrics that they can say,
"What are my cost of goods sold?
What's my profit margin?
And ultimately, what's the bottom line?"
Profit and Loss Statement is one of the most important tools for any business owners.
The balance sheet often confuses entrepreneurs because it deals with accounting terms. Why is this financial document important?
Jeremias Ramos, CPA: A balance sheet lays out all your assets, your liabilities and your equity. This is where you have your assets on one side then you have your liabilities and you have your equity on the other side (Assets = Liabilities + Equity). So when you add all those together it should net out. When considering your assets, how do you pay for assets?
One way to acquire assets is to borrow money. So if you want to buy a vehicle or a piece of property, either have a loan or you can put your own money into it which is the equity. As the business owner progress through year one, year two, and year three the more money he or she makes, the bigger the equity is.
And then when you pull money out of your business then it decreases the equity. So it's really a financial snapshot of where you are exactly at that date.
Describe the Cash flow Statement.
Jeremias Ramos, CPA: A cash flow statement is probably one of the most underrated financial statements. Everyone wants to see the profit and loss statement and say, "How much money did I make?" But, the cash flow statement is great because you can actually see where your cash went, your ins and your outs.
I'll often show clients financials that they owe X amount of money, they made this much profit, and they'll say, "No, that's impossible, I only have X amount of money in the bank." I can show them through a cash flow statement that this is their "This is your top line, this is what you brought in through a revenue, this is what you paid out through expenses, and then these are your debt payments, and these are the distributions you made." And we can break down exactly where the cash went with a cash flow statement.