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Cash Receipts and Disbursements Not the Best Way to Determine Profitability

Speaking with entrepreneurs recently (especially those w/businesses that buy/sell inventory) I’ve noticed a lack of understanding of the difference between cash flow and net income, profitability.

Let me give you an example:

  • Business selling inventory
  • Start business by purchasing 10,000 units at $1/unit; total purchase = $10,000
  • Sell 1,000 of those units for $5/unit; total sales = $5,000

Let’s stop here for a second.  At this point, many of you might come to the conclusion that you haven’t made any money (profits).  After all, cash spent ($10,000) exceeds cash received ($5,000 sales) and so your net cash flow is negative $5,000.   This view of the facts doesn’t tell the whole story.

Let’s view the facts using simple accounting:

  • Sales                                                  $5,000
  • Less: Cost of Goods Sold           ($1,000)
  • Equals: Gross Profit                     $4,000

Some of you may be thinking how can I have gross profit when I’ve spent more than I’ve collected in sales?  Good question!  The reason is that you’ve sold each of the 1,000 units for more than you paid for them individually.  The remaining $9,000 ($10,000 initial purchase less $1,000 cost of good sold) of inventory remains on your Balance Sheet as an asset.  It is not “expensed” on your Profit and Loss Statement until the units are actually sold.

Assuming the inventory doesn’t expire/spoil (think produce or other food type products) then your $9,000 of inventory will remain at that value on your Balance Sheet and will be “costed” to the Profit and Loss Statement at $1/unit.

My point is this.  Having the proper understanding of accounting for sales, inventory and cost of goods sold would lead you to better decision making.  Let’s say these items are flying off the shelves quickly and you’re profiting $4/unit ($5 sales price less $1 per unit cost), you definitely would consider buying more inventory even BEFORE you’d recouped your initial $10,000 investment.  Waiting until you recouped your initial $10,000 investment would cause you to miss profitable sales in the interim.

Above said, any credible accounting software that has an inventory function should be able to handle the accounting properly.  I recommend Xero or QuickBooks (desktop version) to handle inventory and consult on either software.

I hope this simple example will help you gain an understanding the differences between cash flow and profitability.  I’d love to help clarify the accounting to be used for sales, inventory, and costs of good sold.

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Cloud-based Accounting Tools for Your Business

We’ve been working hard researching and implementing cloud-based accounting and financial tools to help our clients organize their data and cut down on data entry while increasing accuracy.  From an accounting perspective, our focus has centered on Xero (www.xero.com) and all of the ways Xero can help run your business more efficiently.  The beauty of Xero is its seamless integration with many other cloud-based accounting and financial solutions.  At PRM we’re using these solutions for accounts receivable, accounts payable, collections, vendor payments, and document retention all while cutting down on data entry time, streamlining our digital processes, and increasing efficiency and accuracy.  All of the solutions we’ve adopted can be accessed in the cloud via web browser, phone, or tablet.  These solutions really do make it easy to run your business wherever you are.

Bill.com (www.bill.com)

Bill.com is a great tool for digitally managing accounts receivable, accounts payable, collections, and vendor payments

  • Simply fax, scan or email your bills to bill.com. No more opening mail, handwriting approvals and G/L coding directly on the bill.  com’s automated system handles everything from approval to coding once the bill is received.
  • The entire A/P approval and payment process can be managed digitally. Paying vendors is also a breeze using bill.com’s ACH or “ePayments.”
  • Easily syncs w/Xero and QuickBooks further reducing data entry. Payments received and payments made using bill.com flow into your accounting software updating A/P and A/R seamlessly.

What bill.com customers are saying…

https://vimeo.com/111689100

https://player.vimeo.com/video/116381760?width=720&height=405&iframe=true

Hubdoc (www.hubdoc.com)

Hubdoc is a great storage tool for financial documents and receipts.

  • Hubdoc imports your financial documents and receipts in 3 easy ways:
    • Snap and send a picture of your receipt to your Hubdoc account using the Hubdoc app. We’ve been using this for all debit and credit card charges.  Once in Hubdoc we have the ability to sync w/Xero.  Data entry is easier (automated) AND the transaction will include a copy of your receipt.  What better way to defend yourself in an IRS audit than to have the transaction properly coded and have a receipt attached?
    • Link your financial accounts to Hudoc
      • We’ve linked our bank and credit cards to Hubdoc. Hubdoc automatically imports each month’s statement
    • Forward invoices from your inbox or have vendors send invoices to Hubdoc for you
      • Hubdoc recognizes your email address so you can easily import documents into your account via email. Simply send a vendor invoice from your email account and Hubdoc places the invoice in your account
      • Have vendors send their invoices to a specific email address provided by hubdoc. My vendors can send an email to marcusmire.hubdoc@app.hubdoc.com and those invoices will automatically import into my account

Quick Hubdoc video

https://www.youtube.com/watch?v=qH27ZChAfdg

Give these tools a try.  My bet is that you’ll be amazed at the ease of use, quick set up, and convenience.

I’d love to talk with you about these tools and how they can transform your business’ efficiency.

 

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Accounting Made Simple, Smart and Secure with Xero Accounting

In today’s on the go, information at your fingertips world, being able to do business anywhere is essential.  That’s why I’ve become a Xero Certified Advisor.

Xero is a cloud-based accounting software that connects people with the right numbers anytime, anywhere, on any device, allowing you to focus on what you do best – running your business.  Here are a few key features of Xero and why I believe it’s a great solution for many small businesses:

Bank Feeds –  allows you to automatically import account transactions into Xero from your bank or other financial institution.  Once “bank feeds” are up and running, you’ll no longer need to download and import bank statements to get transactions into Xero.  No more gathering bank and credit card statements!

Real Time – use Xero to collaborate in real time with your accountant via Xero’s web-based access.  With “bank feeds” importing data daily, adjusting journal entries can be made as needed, and reports can be produced on a frequency (monthly, quarterly, etc.) that you choose.  No more swapping flash drives with backup data, waiting on adjusting entries from your accountant, or waiting until year-end to have a set of accurate financial statements.  Real-time data also leads to better decision making through timely analysis of financial information.

Mobile – Xero’s mobile app gives you freedom, with easy access to the essential tools for doing business on the move. With Xero mobile you can get paid faster by sending an invoice the minute you’ve finished a job, capture receipts on the go, and stay on top of your cash flow by reconciling bank transactions from wherever you happen to be.

I’d love to show you the features of Xero and how I can offer you a flat-rate monthly price based on your needs.  No guesswork as to the amount of your invoice each month.  If you’re interested in learning more about Xero and how it can help your business, give me a call or contact us here!

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