The Financial Statement

Good morning and thank you to everyone who liked and forwarded my post yesterday about the Crestline Culture Fair.  David is going to be very excited he is a star!

I am often asked, “Does my business need to have a financial statement?”  And, like all good professionals, my answer is, “Yes, but it depends.”

A small business can produce more than one type of financial statement.  Typically, the financial statement which people ask about is the Accountant prepared financial statement so this type of financial statement is what I am writing about today.  This is almost universally required when you have a large bank loan.    Your bank likes having a financial statement prepared by someone who understands the value of a well-designed financial report.  Which leads to the most important take-away for today.  Believe it or not…

Your financial statement is actually a marketing piece.

Think about this for a moment.  Your financial statement helps the reader – let’s say a banker in this instance – understand what your business does, how well you perform and the strength of your assets.  While your accounting system can easily produce “Profit and Loss” statements, “Balance Sheets” and even “Cash Flow” statements, these system financial statements are often hard to follow because accounts are not grouped and there is too much detail.  Do you want something that makes the banker smile or frown?

Far too often, the detail begs more questions than it provides answers.  Negative numbers where positive numbers are expected is the biggest issue that is faced.  Expenses that are wildly different from one year to the next, making comparison extremely difficult.  Accounts where the balance remains the same year after year, even though the balance should probably change given the nature of the business.  There are often valid reasons why account balances are different from year to year, but how do you go about explaining this to the bank?

Remember, the bank wants to help your business but your banker and the underwriter must feel that your business is creditworthy.  A well-prepared financial statement can help tell the reader a great deal about the business and how well it might manage the bank’s loan.

The reason your banker typically asks that you have a financial statement prepared by an independent accountant is that accounting professionals are trained in the art and science of financial statement preparation.  We make sure that the Company’s financial statements are easy to follow and understand.  This allows the banker to spend more time on knowing you and your business and less time trying to determine how your cash flows work.

If you are thinking about a bank loan, take a good, hard look at your financial statements.  Do the numbers make sense?  Is there too much detail that doesn’t tell the story?  Then ask your accounting professional to help you make sure your financial statements are ready for the bank.  We also have an Excel Spreadsheet for a very well-designed financial statement.  Feel free to contact me and I can email it to you for you to evaluate.  If you are not working with an accounting professional or would like to have a fresh opinion, feel free to contact us for a free evaluation.  At Currie & McLain, we are here to help you and your small business succeed.


Accounting for Revenue

Happy Monday!  I hope you enjoyed your weekend.  Here in Vancouver it was nice and warm, upper 90’s both days, and it was a weekend with the boys which made it even better.  Did you do anything fun?

Revenues in Small Business

The accounting for revenues in a small business can be a little tricky.  Depending on your industry, sending out an invoice does not automatically make the amount “revenues” under Generally Accepted Accounting Principles (GAAP).  However, for your purposes as the small business owner, sending out that invoice as early as possible can be extremely important for your cash flows.

The 3 Reasons Not to Record the Invoice as Revenue

Under GAAP, revenues and costs are supposed to be matched so that someone outside your business who reads your financial statements – such as your banker when you apply for a loan – can understand your costs in relation to your income.  But there are other reasons to consider not recording some invoices as revenues at the time of invoicing your customer.

  • The Invoice is for a Deposit on Work to be Completed Much Later

At my last Company, we often charged a deposit of 50% to secure time on the master schedule.  Since many of these projects were worth over $20,000, the plan was to ensure the Customer had “Skin in the Game”.  From a cash flow perspective, it was great to get the money in before we had to start ordering materials and parts.  From an accounting perspective, however, we faced several potential issues.

  • Customer wanted to cancel the work

Eventually, a customer cancels the work that they requested.  If you are lucky enough to have the customer cancel in the same month, then there is no problem as the receipt of the money and the repayment happens in the same month and they cancel each other out.  But what if the customer cancels 2 months later?  Your Income Statement looks odd as Month 1 reports all this income and then Month 2 shows either a negative income for that amount or you show some sort of discount or allowance or perhaps you have a refunds account.  If it is only you looking at the financial statement, then it is probably not a problem, but if you have someone like your banker or insurance agent looking, you have to explain, which may cause them to question your accounting. Plus, the risk is your Company spent the money and has to scramble to find funds to repay the deposit. 

  • Labor and materials are not being used on the project for 3-9 months

This is somewhat along the lines of what we discussed above.  In month 1 you record all your income and then month 4 you have all your expenses, you cannot really tell how well you are doing by looking at your financial statement.  If you are trying to run your Company by the numbers, this may cause you to think things are going well in Month 1 and not-so-well in Month 4.  By using some method for project accounting, you can see how well your projects are doing over time, but these will not roll-up to your Income Statement.

  • The Invoice is for Work to be Done Over Time

Think Ongoing Contract like in a gym membership.  Lets say you give your customer a chance to pay monthly or offer a discount to pay in advance for a whole year.  Those who take advantage of the discount are still going to use the gym (well potentially use the gym but that is a different matter) over the next 12 months.  To match up with the members who pay monthly, you may want to make sure that your accounting team keep a different schedule (perhaps in Excel) which tracks who has paid and the charge per month for the year.

Revenues in small business are not always easy.  If you are the only person who will ever look at your books, then you can keep them anyway you want and work with your outside accounting firm at year-end to get the numbers right for tax purposes.  There are benefits to running your books to record revenues when invoiced, but there are perhaps many challenges to this as well.  Talk with your accounting professional for advice on the best way for your business.

If you have questions and would like a free, no obligation consultation, write me using the contact form below and we can have a conversation about your concerns and how to address them.

Have an awesome Monday.


Exciting Announcement

I am excited to share the news that I am returning to Public Accounting.  After 5 years of a great experience helping VSource Systems and US Cryogenics with their accounting, finance, business development and strategic planning I have joined the Vancouver firm of Currie & McLain.  I am absolutely delighted to join a firm that shares many of my visions about how the future of accounting and client relationships are going to change in our fluid, virtual future.

For those of you who recall my blogs for both Golden & Company and Argentstratus, I tend to discuss both current relevant topics and my musings on the future of business and, in this case, accounting.  I will write about the issues I see (genericized to protect identities of course) and some ways to resolve the issues. I would also be thrilled to have a conversation with you about your business and share your insights on this blog.

For my 100 day “honeymoon” period, I will be focusing on the firm’s processes and looking at how work gets done, with an eye to evaluating what that work can look like in a fully virtual world.  My goals is always looking at process improvement to ensure the client’s needs are met consistently and effectively – focused on meeting the client’s budget and expectations.

If you have questions that you do not mind having answered in public, I will have a Q&A section to help us all.  As I get settled in, I will also be available for free, no-cost or obligation consultations.  Yes, there are rules, limitations and exclusions, but I personally believe that by serving each other, we grow stronger and better.

I am looking forward to catching up and sharing with you.

Your friend in business.

John Caughell