Assets = Liabilities + Equity
At the end of the company’s reporting period, a snapshot is taken of the company’s financial health. A balance sheet allows owners to get a glimpse into the company’s financial standings. The balance sheet is one of the three primary financial statements that business owners use. It allows owners to get a glimpse into the company’s financial standings and see what the company’s financial position is. It shows what assets are owned, which liabilities are outstanding, and any equity that has been made.
Assets are the things companies own and are categorized into two categories; current and non-current assets. Current assets are defined as cash and any other asset that will be turning into cash within the company’s operating cycle. Assets are the top part of the balance sheet and will be listed in the order of liquidity. Liquidity meaning that this item can be turning into cash quickly. An example of what order current assets would appear on the balance sheet is; cash, temporary investments, accounts receivable, inventory, supplies, and prepaid expenses.
Non-current assets are not intended to be turned into cash with the company’s operating cycle and are what the company owns. They’re the fixed assets such as office equipment, building property, land, long term investments, stocks and bonds.
Liabilities are financial contracts that require a payment of cash for compensation. Liabilities are also categorized into two categories; current and non-current liabilities. Current (or short term) Liabilities are obligations that are to be paid within 12 months or expected to be paid off within its normal operating cycle. Some examples of current liabilities are accounts payable, wages, and rental payments.
Non-current liabilities, also known as long term liabilities are financial contracts that are not due within 12 months, or within the company’s operating cycle. They’re not expected to be liquidated anytime soon. Long-Term liabilities indicate how much the company is currently in debt vs it’s cash flow. Some examples of long term liabilities are bonds payable, long term leases, and product warranties.
Equity is what is remaining after you subtract what you own (assets) from what you owe (liabilities) and is called net worth. After all debits and obligations have been paid for any remaining values belong to the business owners, also known as owner’s equity.
Want to learn more?
Accounting can be very challenging. We find that most business owners don’t know where to get started. On Wednesday April 25, 2018 at 11:00 AM EST we will be presenting a webinar called “Tools Your Business Can't Live Without: The Only Accounting Guide You'll Need.” Content that will be covered in the webinar will include going over the principles of accounting. Our webinar will ensure that small business owners will have the tools to understand their finances. Topics that will be covered in this webinar are Introduction to Cash Flow, Income Statements and Balance Sheets.Visit the link below for more details.
Crystal Williams, Web Marketing Assistant, WebSan Solutions Inc.,a 2017 Microsoft Modern Marketing Innovation Award Winner
I've seen it numerous times...it happens in law firms, accounting firms, consulting firms, and any company where employees are the "product" upon which revenues are based.
The problem with the professional services industry is that a large key to success is cash flow management. That means that you must effectively manage the time between when your resources perform the work and when the customer pays. Let's take a look at the whole process.
Part 1 : Time and Expense reporting
To effectively get your personnel to report their time and expenses, it must be simple. Some of the ways to address this are :
- enable your team to enter their time and expenses through a simple to use web portal, or even a mobile device. That way it doesn't take a significant amount of time out of their day to "get their paperwork in".
- set up a process whereby remote users can simply mail their expense receipts to head office (or even scan them into a central server). The receipts should be indexed with the expense report number as well.
Part 2 - billing entry
- the time and expense reports should be approved by a manager, preferably online, and afterwards should move seamlessly into the billing engine
- the billing process should be automated from the time and expense reporting, with minimal, if any, manual intervention. We find in most professional services firms that this is an area where the most manual intervention takes place.
- if the invoices need to be approved as well, this should be done online and with workflow. This step is usually a "crutch" for poor time and expense reporting accuracy, so it's acceptable for this to be part of the process to ease the transition to a new system for management. After a while, however, this approval step should be eliminated.
Part 3 - customer invoicing
- during all professional services systems implementations, I insist on the client providing us 2-3 customers to interview. This is because the #1 reason why bills are not paid on time is because they are not clear and concise for the customers.
- invoices should be standardized, but can also be customized by customer. This is a service I would recommending charging for, but it can also reduce their time-to-pay. The theory is simple: if a customer gets their bill in exactly the format they're looking for, then why would they need time to reconcile it against their records? Provide as much information as possible, presented in a way that they want, and watch your open AR shrink.
So there are some creative ways to affect your cash-to-cash cycle, while improving customer service and reducing costs as well.