How to Set-Up an Enterprise
Paying Back Loans and Profit Generation
Manage your cash Flow to pay back your loans, debts or credits. A healthy cash flow is an essential part of any successful business. If you fail to have enough cash to pay your suppliers, creditors, or your employees, chances are you will be out of business very soon. You should pay back the loans so that when you need loans in future, you get one. You can pay the loans or debts as per terms and conditions initially agreed upon, if you can't pay in time inform the creditor, ask for an extension stating the reasons. Proper management of your cash flow will ensure the same and is a very important step in making business successful.
To handle your business properly learn the basics of accounting, inflow and outflow of cash. You can take help of your accountant, get help from a friend or family member in the initial stages. There is nothing in finance that can not be understood by a common person. To manage finance properly
- Understand Cash Flow. It is the first step in effectively managing your cash flow. There's more to it than just a the movement of money into, and out of, your business checking account. It is an essential ingredient for running a business successfully, the better you understand it less are the chances that you will be in financial mess or worse have a case of money swindling
- Analysing Your Cash Flow will help you spot some of the problem areas in the cash flow cycle of your business. As in any good analysis, you need to look individually at each of the important components that make up the cash flow cycle, to determine if it's a problem area or not.
- Have A Cash Flow Budget is good way of predicting your business's cash flow for the next month, six months, or even the next year.
- Improving Your Cash Flow will, without a doubt, make your business more successful. Accelerating your cash inflows and delaying your cash outflows are key factors for improving and managing your cash flow. The cash flow budget is also a handy tool to use in the improvement and management of your cash flow. A good cash flow will ensure a healthy profit.
- Fill Your Cash Flow Gaps: from time to time, almost every business experiences the need for more cash than it has. If you find yourself in this position, you may have to borrow money to fill the gap.
- Handling Any Cash Surplus Or Profit is just as important as the management of money into and out of your cash flow cycle. With the proper management of your cash flow, you might find yourself with a little extra cash, on which you can earn investment income or utilise it during lean times.
Basics of Accounting
There are a few (and only a few) things you need to understand in order to make setting up your accounting system easier. They're basic (trust me), and they will probably clear up any confusion you may have had in the past when talking with your CPA or other technical accounting types.
Debits and Credits
These are the backbone of any accounting system. Understand how debits and credits work and you'll understand the whole system. Every accounting entry in the general ledger contains both a debit a/c and a credit a/c. All debits must equal all credits. If they don't, the entry is out of balance. Out-of-balance entries throw your balance sheet out of balance and shows something is amiss somewhere. so start from beginning.
Depending on what type of account you are dealing with, a debit or credit will either increase or decrease the account balance. Figure 1 illustrates the entries that increase or decrease each type of account.
Debits and Credits vs. Account Types
In above figure for every increase in one account, there is an opposite (and equal) decrease in another, this keeps entry in balance. Also to be noted is the fact that debits always go on the left and credits on the right.
Let's take a look at two sample entries and try out these debits and credits:
In the first stage of the example we'll record a credit sale:
|Accounts Receivable||Rs. 15,000|
|Sales Income||Rs. 15,000|
If you looked at the general ledger right now, you would see that receivable had a balance of Rs. 15,000 and income also had a balance of Rs. 15,000.
Now we'll record the collection of the receivable:
|Accounts Receivable||Rs. 15,000|
See how both parts of each entry balance, how in the end, the receivables balance is back to zero? That's as it should be once the balance is paid. The net result is the same as if we conducted the whole transaction in cash:
|Accounts Receivable||Rs. 15,000|
Of course, there would probably be a period of time between the recording of the receivable and its collection.
Assets and Liabilities
Balance sheet accounts are the assets and liabilities. When we set up your chart of accounts, there will be separate sections and numbering schemes for the assets and liabilities that make up the balance sheet.
Assets increase with a debit and decrease with a credit. Liabilities increase with a credit and decrease them with a debit.
Simply stated, assets are those things of value that your company owns. The cash in your bank account is an asset. So is the company car you drive. Assets are the objects, rights and claims owned by and having value for the firm.
Since your company has a right to the future collection of money, accounts receivable are an asset-probably a major asset. The machinery on your production floor is also an asset. If your firm owns real estate or other tangible property, those are considered assets as well. If you were a bank, the loans you make would be considered assets since they represent a right of future collection.
There may also be intangible assets owned by your company. Patents, the exclusive right to use a trademark, and goodwill from the acquisition of another company are such intangible assets. Their value can be somewhat hazy.
Generally, the value of intangible assets is whatever both parties agree to when the assets are created. In the case of a patent, the value is often linked to its development costs. Goodwill is often the difference between the purchase price of a company and the value of the assets acquired (net of accumulated depreciation).
Liabilities as the opposite of assets. These are the obligations of one company to another. Accounts payable are liabilities, since they represent your company's future duty to pay a vendor. So is the loan you took from your bank. If you were a bank, your customer's deposits would be a liability, since they represent future claims against the bank.
We segregate liabilities into short-term and long-term categories on the balance sheet. This division is nothing more than separating those liabilities scheduled for payment within the next accounting period (usually the next twelve months) from those not to be paid until later. We often separate debt like this. It gives readers a clearer picture of how much the company owes and when.
After the liability section in both the chart of accounts and the balance sheet comes owners' equity. This is the difference between assets and liabilities. Hopefully, it's positive-assets exceed liabilities and we have a positive owners' equity. In this section we'll put in things like
- Partners' capital accounts
- Retained earnings
Another quick reminder:
- Owners' equity is increased and decreased just like a liability
- Debits decrease
- Credits increase
Retained earnings are the accumulated profits from prior years. At the end of one accounting year, all the income and expense accounts are netted against one another, and a single number (profit or loss for the year) is moved into the retained earnings account. This is what belongs to the company's owners-that's why it's in the owners' equity section. The income and expense accounts go to zero. That's how the new year with a clean slate against which to track income and expense.
The balance sheet, on the other hand, does not get zeroed out at year-end. The balance in each asset, liability, and owners' equity account rolls into the next year. So the ending balance of one year becomes the beginning balance of the next.
Think of the balance sheet as today's snapshot of the assets and liabilities the company has acquired since the first day of business. The income statement, in contrast, is a summation of the income and expenses from the first day of this accounting period (probably from the beginning of this fiscal year).
OIncome and Expenses
Further down in the chart of accounts (usually after the owners' equity section) come the income and expense accounts. Most companies want to keep track of just where they get income and where it goes, and these accounts tell you.
For income accounts, use credits to increase them and debits to decrease them. For expense accounts, use debits to increase them and credits to decrease them.
If you have several lines of business, you'll probably want to establish an income account for each. In that way, you can identify exactly where your income is coming from. Adding them together yields total revenue.
Typical income accounts would be
- Sales revenue from product A
- Sales revenue from product B (and so on for each product you want to track)
- Interest income
- Income from sale of assets
- Consulting income
Most companies have only a few income accounts. That's really the way you want it. Too many accounts are a burden for the accounting department and probably don't tell management what it wants to know. Nevertheless, if there's a source of income you want to track, create an account for it in the chart of accounts and use it.
Most companies have a separate account for each type of expense they incur. Your company probably incurs pretty much the same expenses month after month, so once they are established, the expense accounts won't vary much from month to month. Typical expense accounts include
- Salaries and wages
- Electric utilities