A start-up business can be overwhelming. As a new business owner, you might be asking yourself “What do I need to keep track of?” and even more fundamentally, “Where do I start?”.
Below are some tips on key financial statement line items to help you start answering these questions. Cash is considered the hardest item to maintain and manage during the founding years of a start-up; therefore, the tips below center around cash flow.
1. Revenue:
(i) What is Revenue?
Revenue is the total amount of money brought in by a company over a certain period. An organization may be concerned with the timeliness of collection from customers and improving this collection period.
(ii) Notes to Ensure Success
- Ensure that your invoice clearly states your collection terms.
- Once collection exceeds terms listed above, someone should be reaching out to the customer to ensure they are made aware of a late payment.
- Communication with the customer should include asking for a period in which we can expect to receive the funds in question and ask to provide insight for future sales.
- Ensure that all customer orders are calculated as a percentage of monthly sales and year-to-date sales to identify returning and large volume customers.
(iii) Opportunities in Your Business to Improve
- While following up with customers can seem intimidating at first, consider it an opportunity to check in with your customers and foster relationships. Following up and speaking directly on behalf of your start-up humanizes your business. These relationships may lead, not only, to increased sales but also decrease odds of receiving a delinquent payment.
- Additionally, the customer calculations should be leveraged to ensure you know which customers make up most of your business. This will help you prioritize orders from returning customers and will also help you narrow your target market and find your niche.
2. Expenses:
(iv) What are Expenses?
Expenses are any cost incurred to obtain something.
(v) Notes to Ensure Success
- Any invoices should be directed to a central inbox, which should be monitored at a minimum, weekly.
- Generate an accounts payable aging schedule to ensure you are maintaining sufficient cash flow to cover upcoming expenses.
- Ensure you are conscious of wire and banking fees.
- Ensure that all customer orders are calculated as a percentage of monthly sales and year-to-date sales to identify consistent and large volume vendors.
- While processing AP you should be looking for ways to move your expenses from the income statement to the balance sheet.
(vi) Opportunities in Your Business to Improve
- An accounts payable aging schedule will allow you to schedule payments based on the date they are due. This way we can ensure that the most amount of cash will be sitting in the bank account for the longest period.
- An exception to the above would be if the vendor offers an early payment discount. Take advantage of all discounts offered to save money. This is a priority over keeping funds in your bank account.
- When tracking your vendors, ensure you are asking the vendor for discounts or negotiating payment terms.
- Otherwise, if no discounts or negotiating terms are available it might be advantageous to shop around for other vendors who can provide the same service at a lower cost.
Identifying expenses that are prepaid, or capital in nature will be summarized below. This is an important step as it will move the expense from your income statement to the balance sheet for the time being. Further, this allows you to incur the expense over a period of time, instead of incurring the full expense within the month received.
3. Assets & Liabilities:
(vii) What are Assets and Liabilities?
Assets are anything that has current or future economic benefit. A liability is an obligation, typically to pay, within an accounting period. The following types of assets and liabilities will be discussed as they relate to the accounts payable process.
Prepaid assets – An expense incurred that relates to future services provided or services provided over a future period.
Capital Assets (Tangible or Intangible) – An asset that intends to generate revenue or assist in generating revenue with a useful life of greater than a year.
Accruals – A liability for an expense that is for services provided in the current period but will be invoiced in the future.
(viii) Notes to Ensure Success
- When processing accounts payable ensure that you are looking for any expenses that meet the definitions provided above.
- An accrual will likely be the toughest one to identify through accounts payable. These typically derive from contracts for upcoming projects or could be seen within accounts payable if you are provided a payment schedule within an invoice. Accruals are estimates and do not need to be exact.
(ix) Opportunities in Your Business to Improve
Identifying the above will improve your financial statement performance. All of these items will allow you to recognize the expense over a period of time instead of having the expense incurred on the income statement within one period. This also provides a more accurate financial position of your organization.
4. Financial Analysis:
(x) What is a Financial Analysis?
The process of evaluating financial results to determine performance.
(xi) Notes to Ensure Success
Financial statements should be produced monthly to ensure timely analysis of financial results. Delivery of financial statements should be within 15 days of month-end.
(xii) Opportunities in Your Business to Improve
- Financial statement analysis will be dependent on the industry you operate within. Research industry specific standards and ratios to ensure that your organization is hitting benchmarks applicable to the industry you are operating within.
- Generally, a few to calculate are: cash burn rate – the amount of cash spend within a given month and cash runaway – the amount of months until you run out of cash.
The above tips will help you identify key areas within your financial statements to watch out for. These concepts although simple in definition can be tough to implement as a key stakeholder of your organization. Time is typically a factor. For you, the best advice may be to hire an accountant to ensure that all the above are being met and to additionally ensure that the financial reports provided are complete and accurate.
This may look different for every organization and could vary from a part-time accountant to a full-time Chartered Professional Accountant. At bare minimum, a tax accountant should be retained to file corporate taxes. This is a complex area, and the tax accountant will provide some assurance that the numbers you are reporting are accurate.
Overall, accurate and timely financial reporting is vital to your organization as you will be making key decisions based on these metrics. If the underlying values are incorrect, you could be making the wrong decision for your business. Moreover, this will assist in the future of your business. Investors, or lending agencies will require financial statements.
