10Apr
How to Create & Maintain a Balance Sheet

Have you ever wondered how to create & maintain a balance sheet?

The balance sheet provides a summary of your company’s financial situation as of a particular date. The balance sheet explains in non-accounting words what your company possesses (assets), what it owes (liabilities), and what the owner’s interest in the company is (equity).

Essentially, if the financial statements are the story of your company, the balance sheet is the CliffsNotes. Your balance sheet gives you a clear image of what you own and what you owe, as well as a summary of your company’s financial status at a particular point in time. Below you will find information on how to create & maintain a balance sheet.

What are the main parts of a balance sheet?

1. Assets

Assets are the items that your company owns. They are often divided into two sections on balance sheets.

Current assets

Firstly, current assets include cash and other assets that you anticipate selling in the upcoming year. As such, inventory and accounts receivable are examples of current assets.

Fixed assets

Secondly, fixed assets are owned assets or equipment that the business uses to generate revenue from its operations. Fixed assets are things that will not likely be sold and that are bought for a lengthy period of time (longer than one year). As a result of wear and tear, their value depreciates over time. On the income statement, this modification is noted as depreciation.

2. Liabilities

Liabilities are the sums that your company owes to third parties in the next 12 months. More specifically, balance sheets divide liabilities into two divisions. Current liabilities and long-term liabilities.

Examples of current liabilities include accounts payable, credit card bills, sales taxes collected, payroll liabilities, and loan payments. Whereas, examples of long-term liabilities are term loans and mortgages.

3. Shareholders’ Equity

Shareholders’ equity is the value of the company’s obligation to shareholders. It is what the company owes you.

Equity includes:

The amount of money put into the business by its shareholders (startup cash you invested, etc.)

The amount of money generated by a business (amounts you have left in the business over time.)

Any donated capital.

Calculated equity using this formula: Equity = Total Assets – Total Liabilities

A Balance Sheet Preparation Guide

To produce an accurate balance sheet, you can use your accounting software. In every program designed for double-entry bookkeeping, the balance sheet is a standard report.

Firstly, go to the reports section of your accounting program and search for financial reports. The balance sheet should be near the top of the list, frequently right after the profit and loss (or income) statement because it is a common financial statement.

For the balance sheet report, some accounting software asks you to specify a time range. This can sometimes cause confusion. The balance sheet displays information as of a certain date. However, the profit and loss statement only displays information for a specific time period.

Furthermore, along with a financial overview of your company from the beginning to the balance sheet’s “as of” date, this data also provides a financial summary of your company.

The balance sheet’s objective

Primarily, balance sheets are utilized as a method for determining whether or not the accounting procedure produced accurate results. It is easy to spot an error on the balance sheet if assets do not match liabilities plus equity.

Contemporary accounting software does not allow for the recording of transactions that are not balanced, uneven balance sheets are an extremely rare occurrence. An uneven balance sheet typically denotes a software-related issue. Nowadays, balance sheets aren’t needed anymore. However, the balance sheet helps you measure your company’s health and make informed business decisions.

In short, a balance sheet is a critical tool for assessing your company’s health and making prudent business decisions.

How to make business decisions using your balance sheet

With a quick glance at the balance sheet, you can assess the financial health of your company. If equity is negative, which means liabilities exceed assets, that may be a sign that your company is having financial problems. Schedule a meeting with your accountant to discuss this.

Further, you can identify three key parameters from your company’s balance statement.

Current ratio

The current ratio gauges the capacity of your company to meet its short-term obligations. The equation is: Current ratio is equal to Current Assets / Current Liabilities.

The current ratio reveals how many times your company’s available cash can cover its current liabilities. Anything below 1 means your company won’t have enough cash or cash equivalents to cover its obligations over the course of the next 12 months.

Quick ratio

This is the quick ratio formula: Quick ratio: Current liabilities / (Cash & cash equivalents + Short-term investments + Accounts receivable)

The quick ratio, which measures liquidity, is frequently identical to the current ratio.

The ratio of debt to equity

The debt-to-equity ratio reveals how much of your company is financed by debt, or how leveraged it is.

The equation is: Debt-to-equity ratio = Total Liabilities / Total Equity

Keep in mind that we are now examining all liabilities, including long-term debt. Between 1 and 1.5 is a healthy debt-to-equity ratio. Anything above that may be a sign that your company is heavily leveraged. This can make it more difficult to find financing at a good rate.

Things to consider

The ratios are useful for making fast assessments of how well your company is performing in a few key areas. Evaluate the balance sheet, the profit and loss, and the cash flow statement in order to make good business decisions.

5Feb
5 Product Pricing Tips to Pump up Profits

5 product pricing tips to pump up profits. It’s critical for small businesses to keep their profit margins strong. Setting prices for products correctly is essential to both boosting present profitability and promoting future growth. The art of pricing for profit is a crucial skill that many entrepreneurs may not naturally possess, so it is imperative that small business owners develop it.

When deciding how much to charge for their products and services, entrepreneurs must take into account the time and inherent value of their work. Customers are frequently prepared to pay more for higher quality, which highlights the importance of strategic pricing. Establishing prices that are excessively high for low-value goods or too low for high-value goods can undermine consumer trust. Take into consideration applying these five pricing strategies to increase profitability and obtain a competitive advantage.

Retail to wholesale:

Calculate the costs of manufacturing and marketing the products. During this process, you must outline your marketing strategy. If you want to sell through retailers, you should budget for commissions. When approaching retailers, your selling price must match the wholesale price. Because shops resell products, it’s critical to avoid competing with them when deciding on retail pricing. The pricing formula is as follows: retail price = wholesale price x 2.5, while wholesale price equals total cost x 2. If you have a wholesale price of $40 and a retail price of $100, your total cost is $20.

Premium costs:

Companies with unique products use this method regularly and charge significant costs. If your product has a patent or trade secret that offers it a competitive advantage, you should utilize it.

Bundled offers:

Multiple items can be offered at a lower price than if they were sold individually. Frequent examples are Buy One Get One Free and Buy One Get One Half Off. This strategy helps you reduce inventory while enhancing the value perception of your customers.

Time-limited offers:

This strategy produces a sense of urgency and compels customers to purchase immediately. Consider using a discount or inventory countdown timer on product pages.

Psychological pricing:

Psychological pricing is a pricing approach that uses psychology or the subconscious to get customers to pay more. For instance, $6.99 is considered to be “cheaper” than $7. The idea is that buyers would view the somewhat reduced cost as a bargain and feel encouraged to make the purchase.

After putting a pricing strategy into action for a few months, review and revise your plan. Depending on the situation, you could need to adjust product prices, deal with a competitor, or adjust pricing to changing market trends. Don’t be afraid to change your direction when it’s required. A solid pricing strategy can help your business maintain its competitive edge and attract new customers.

25Mar
Dissecting Different Types of Revenue

Developing good analytical techniques to help you monitor your business performance is important. It will help you avoid silly mistakes that can negatively affect your business. If you have an SaaS product or B2B business model, your recurring revenue is subscription based and often times, contracts differ and generate different income. The terms; committed annual recurring revenue (cARR), annual recurring revenue (ARR) and bookings are used interchangeably. However you should commit to using one to normalize all your revenue. Being consistent will avoid confusion and mistakes. Here’s a break down what each of these terms mean so you can pick what’s best for your business.

ARR, MRR & cARR

Annual recurring revenue (ARR) normalizes the recurring revenue of your term subscriptions into a one-year period. It is the amount over a set period of time usually the contract length, in a year. Committed annual recurring revenue (cARR) is similar to ARR except it is a future amount. It is a committed amount, because that revenue is not readily available to your business just yet. ARR and cARR is especially useful if the majority of your contracts are minimum 1 year. Monthly recurring revenue (MRR) should be used if your contracts are typically below one year. The recurring revenue in a one month period.

ARR Vs MRR

When is Annual recurring revenue (ARR) used? ARR is used in B2B subscription businesses when the minimum subscription period is one year. Businesses with multi-year contracts are more likely to use ARR, and businesses with lower transaction volume and higher transaction value are more likely to use it. B2B and B2C businesses with monthly subscriptions should use MRR. Companies might use MRR and ARR interchangeably and tend to use ARR as a valuation metric and MRR as an operating metric. Let us compare these two metrics. ARR is useful to reference in board meetings or when analyzing the overall performance of the business. MRR is more useful to analyses day to day operations of the business.

ARR Vs Bookings

The total amount signed over a period is referred to as the bookings. This period can vary depending on many things. It could be, the business, individual or customer. In contrast to ARR’s minimum one-year subscription period, no time frame is specified. For instance, suppose we examine three different revenue streams for companies A, B, and C;

A: $1,000 in bookings with a 2 year contract

B: $1,000 in bookings with a 3 year contract

C: $1,000 in ARR

Looking at these three companies, we notice they have $1,000 in bookings. However, if we standardize this to ARR we can easily compare each of these companies revenues. Company A has $500 ARR, company B has $333 ARR and company C has $1000 ARR. This is where analyzing revenue can get confusing if not all normalized to one metric. For simplicity, bookings are standardized to the ARR metric.

Adopting the ARR metric to your business practices will simplify the way you analyze your revenue!