Monthly Archives: December 2016

A Basic Introduction to the Profit and Loss Account

The profit and loss account is fundamentally a summary of the trading transactions of a business and shows whether it has made a profit or loss during a particular period of account.

Indeed, by deducting the total expenditure from total income the profit or loss of a business can be calculated.

Along with the balance sheet, it is one of the key financial statements that make up a company’s statutory accounts.

Basically, this type of account shows the following information for a business:

  • Sales revenue earned by business
  • Cost of sales that the business has incurred
  • Other operating costs incurred by the business
  • Profit/Loss earned by business.

The profit and loss account usually has two columns: one for the current accounting period and one for the previous accounting period. Any costs directly associated with generating sales and also any other operating costs represent debits in the profit and loss account. Furthermore, the other operating costs are usually allocated to categories such as selling or administrative expenditure. The sales income for the business represents a credit in the account.

The basic construction is as follows:

Net Sales = Gross Sales – (Allowances + Discounts + Returns)

Cost of Goods Sold = Opening stock + Purchases – Closing stock

Gross Profit = Net Sales – Cost of Goods Sold

Net Profit = Gross Profit – Other operating costs

The profit and loss account is often seen as a key indicator of how well a business is doing. However, when interpreting the figures it is important to look at them in conjunction with the balance sheet and other financial information included in the accounts. Lastly, you should also bear in mind that the information in the profit and loss account is historic and therefore budgets, forecasts and other management accounting information is likely to be crucial in helping you to make any future financial and/or business decisions.

Commercial Insurance for Small Businesses Protects Investments

Small businesses truly are the backbone of the American economy. In 2013, there were about 28 million small businesses in the U.S. It is estimated that 50 percent of the working population, or about 120 million people, work for a small business. Additionally, they are responsible for creating over 65 percent of new jobs since 1995. Starting a small business is a good option for individuals who want to work closely with their clients, obtain results without layers of corporate bureaucracy, and reap the rewards of their hard work. However, they require research, time, and capital; the Small Business Administration estimates that it costs about $30,000 to start a business. In addition to securing a workspace, necessary licenses, and hiring workers, you should also include the cost of commercial insurance policies to protect your investment in your startup budget, and take measures to prevent being sued.

There are a number of different types of commercial insurance policies. The type of business you run will determine the types of policies that will best protect your investment. All businesses should have general liability insurance. If someone is injured by you, your product, your services, or one of your employees, this type of policy will provide you with a defense, and it will pay any damages associated with the alleged loss. Most businesses will benefit from protection offered by property insurance, which insures against the loss of the location, inventory, or equipment. These types of policies may also insure the property of your clients within your control. For example, if you own a watch repair business that burns down, destroying the watches you are repairing, your policy will cover the loss of the watches.

If your business involves transporting employees or equipment in vehicles, obtaining a commercial insurance auto policy is a wise decision. A commercial auto policy protects damage resulting from collisions. It can also cover any damage caused by employees driving their own vehicles for company business. Companies providing professional services should consider professional liability insurance, which is also known as malpractice, or errors and omissions insurance. This type of policy covers lawyers, accountants, notaries, real estate agents, hair salons, and others, for damages associated with improper service.

The sheer number of available policies can be intimidating, and expensive. You may want to inquire about a business policy, which provides a bundle of services at a discounted premium.

Finally, there are a number of steps you can take to help ensure that you do not need to use any of your various policies. Hire a competent attorney to review contracts or advise you on business practices. Incorporating your business will protect your personal assets from seizure, in the event the business is found liable. You should also do your best to protect files, including client information or credit card numbers.

Consider talking with a commercial insurance agent to discuss policies that might benefit your business. Someone well versed in the field can spot opportunities for a litigious customer, and recommend appropriate coverage.

How to Read a Profit and Loss Statement

When your bookkeeper is done catching up (or maybe reconciling) your books, they give you a few reports, right? As you read the Profit & Loss statement, most people notice two numbers first: gross sales and net profit (the bottom line). What should you think when you see strong sales, decent profit, but there is no money in the bank?

Where did the money go?

The Profit and Loss Statement will outline most business expenses that take place within the operations management of a business. However, there are a few cash expenses that are missing (we also call these Balance Sheet Items). It is important to know what these items are, because spending money here will not be reflected in the P&L. This is also why it’s important to view more than just the profit and loss to manage your business.

Debt Repayment

When you take out debt, or use the credit line, that influx of cash does not show up in the profit and loss statement. Neither does the repayment of said debt. This is true for bank loans, owner loans, and credit cards. As business picks up, and cash is used to repay this debt, you may show a solid profit on your P&L, but not have anything in the bank. Not to worry, your overall asset picture is better (but that’s on your balance sheet).

Asset Purchases

If a business purchase is depreciable, most companies do just that. As an example, a new website depreciates over two years, but the web developer gets paid as the project is complete. That means that half of the expense comes out of cash, but sits on the balance sheet as an asset. Only half shows up as an expense on the profit and loss. There are many business purchases that work this way. Nothing is wrong, but it is important to know the dance between cash, assets, expenses and profit.

Owners Equity

Have you taken a draw from the business? Unless you take it via payroll, it does not show up on the profit and loss statement. It is also a balance sheet item, down toward the bottom: Equity.

Payroll Advances

This used to be more common: a business would do monthly payroll, and do a payroll advance mid-month. If your company does this, the advance does not show up on the profit and loss statement (again, on the balance sheet as a prepaid asset). So, be careful about when you are looking at statements. The profit will be high (and cash low) after the advance, but will correct itself when payroll is run.

So, while a profit and loss can tell you a lot about the ongoing business and it’s sustainability, it will never give you a full cash picture. It is not the same as a cash flow statement, and never will be. (Even in a service business) Your profit and loss should always have a bottom line (positive) number, but your on-hand cash may not be as high. It’s OK. Consider the assets that have changed, too.

Debt-Free Business Financing With No Loss of Ownership Or Control

There is a form of business financing that is debt-free, with no loss of ownership or control.  It is very quick and still readily available.  It is the only form of finance that grows as fast as invoices.  There is no minimum time in business or collateral requirement.  The client’s personal or company credit is usually not important.  Prior liens are usually not a problem, so long as they’re disclosed up front.  (Factors don’t like surprises.  A deal that could have worked will probably die if the factor’s due diligence turns up undisclosed liens.)

This form of finance is called factoring.  Say your company (the client) provides a product or service to a customer, then issues an invoice for those goods or services.  The customer frequently takes 30-90 days to pay the invoice.  Rather than wait, the client can sell the invoice to a third party, called a factor.  The factor will verify that the invoice is valid and that the customer has the willingness and the ability to pay.

The factor will pay for the invoice in two parts.  Initially, he will pay the client an advance of typically 70-80% of the face value of the invoice.  This usually takes less than 48 hours.  When the customer pays, the factor will deduct a fee, and refund the balance to the client.  This fee is mostly affected by the time the invoice is outstanding.

There are numerous advantages to factoring for a client company.  The most obvious one is that cash flow improves immediately.   Factors also provide other benefits as part of their normal business, such as handling collections and tracking accounts receivable.  A factor can provide quality assurance when they verify that the customer received the product.  Another benefit is that a factor will verify a customers’ credit before advancing funds.  If you’re looking to do business with a new customer, but the factor won’t fund their invoices, you will want to be very careful about the terms you offer them.

Factoring rates tend to be higher than bank rates, but when considering costs it’s important to consider the benefits as well.  Having cash on hand to bid more work or take advantage of supplier discounts can make a huge difference.  The objective is to make more money by factoring than you would if you didn’t factor.

Factoring has changed a great deal over the last ten years.  There are 5-10 times as many funding sources now as there were then, so rates and terms are much more competitive.  There are factors for invoice volumes of $500/month to over $10 million/month.  There are factors of all sizes who specialize in the construction and medical industries.

Because there are so many funding sources, your best bet is to use an independent broker.  Most brokers don’t charge any client fees.  They are paid referral fees by the funding sources because the funding sources are wonderful people (many of them are very nice, actually)  and because it’s less expensive for them than advertising.  There is very little difference in referral fee rates between different funding sources, so finding the best match between the needs of the client and the funding source is the primary concern.

Mistakes to Avoid While Purchasing Business Insurance

Every business, whether small, medium or large, is exposed to risks. You can rule out these risks by purchasing business insurance which covers for the loss of revenue.

You should, however, choose the right insurance which is suitable for your business. This article discusses mistakes that you should avoid, while purchasing business insurance.

Right insurance protects your finances:

Irrespective of the size and type, every business has the possibility of facing risks; they can either be man-made or natural. Natural risks include floods, heavy rains, violent winds (storm, gales, hurricanes and the like), lightning and the manmade risks include vandalism, theft, accidents at workplace resulting in casualty, loss of business data, inadvertent leakage of data and so on.

To choose the most suitable insurance for your business, taking into account the nature of your business is very important. While purchasing business insurance, you need to consider things like products/services you offer, the customer base, availability of raw materials, whether the product needs new design/method, or any other issue that may potentially be a risk factor for your business.

Purchasing business insurance is a sensible decision in favour of your business. It is also important that you should avoid the following mistakes while purchasing the insurance.

Underestimating the importance of business insurance:

Every business has its own risks. You should not underestimate the risks your business may face. However small the risk is, you should purchase the right type of insurance for your business. Purchase the insurance even if your company finances are good enough to withstand the risk.

Getting attracted to low priced policies:

Don’t mistake low priced policies for cost effective policies. The low premium might be because the risk it covers is low. If this is the case, it might be troublesome to you in the event the expenses of compensation exceed your policy cover. You need to take an insurance cover that is, sufficiently more than the probable claim for compensation.

Avoid purchasing a smaller cover for your business. In case of higher deductibles, you will have to spend a huge amount from your pocket. A deductible is an amount that the policy holder has to pay before getting compensation from the insurer. The deductibles are small and lead to lower premiums.

As a thumb rule, check out for all the aspects such as, the cover for building (where your business is located), Employers Liability Insurance, as per rules of government from time to time, regardless of your size, type, hazardous nature, location of your business.

Under or over insuring:

Avoid under insurance, it may lead to considerable loss to your business. This is because under-insurance cannot cover all the expenses that you have to bear in the event of claim. Purchase an insurance cover that is adequate for your business.

Over insurance will also not help you. It leads to more expenses. At times you might be tempted to buy business insurance that seems less expensive. But, in reality the insurance cover that is less expensive may not cover the type of risk that your business may face.

Buying insurance from brokers/agents with no/less knowledge:

Purchasing insurance is not an easy task. It requires great deal of research. Choose brokers/agents who specialise in business insurance. Ensure you choose the ones that have good track-record in claims settlement and servicing the users.

Consider purchasing insurance from brokers. Look out for an insurance broker with great experience and repute, and who can provide you the best service at optimal costs. You should avoid brokers/agents with lower credibility.

To forge an optimal deal for your business, choose a reputed brokerage firm. Such brokerage firms deal with a range of insurance products, and are knowledgeable. Brokerage firms deal in insurance products of all insurers, claim settlement, application and submission procedure.