Introduction to Accounting Presented by &

An Introduction Here is what we’ll cover in this presentation Accounting. Why do you need it? Legal structures Tip: Establish separate finances The Accounting Equation Types of Presentation Example Financial Statements Create financial projections Calculating and Interpreting Financial Ratios Options for Bookkeeping Spotlight: Accounting for Freelancers

Why Accounting? Why do I need accounting and bookkeeping? Common lender requirement Accurate Tax Filing Accounting = critical management decisions

Selecting a Legal Structure Sole Proprietorship / Partnership Personal legal liability Pass-through taxation Flexible filing requirements S - Corporation Limitation of liability Cumbersome legal filings / limitation of shareholders C – Corporation Entity-level taxation Cumbersome legal filings / no shareholder limitations Limited Liability Company Can be taxed as either pass-through or entity-level

ESTABLISH SEPARATE FINANCES Advantages It is important to establish separation between your business assets and your personal assets. Critical advantages include: Ease of organizing business deductions Protect your limitation of liability (applicable for corporations and LLCs) Clean and easy bookkeeping and financial statement preparation Regardless of what type of company, it’s important to remember:

The Accounting Equation Assets Liabilities Equity Home Loan Example Value of your home – Amount owed on mortgage = Equity

BALANCE SHEET Important to know what’s going out and what’s coming in and actually knowing what you’re making.

BALANCE SHEET Composition Elements of the balance sheet Assets – claims to future benefit Liabilities – claims against future benefit Equity – net claim to future benefit

BALANCE SHEET Composition Examples of assets Cash Accounts Receivable Fixed Assets (e.g. equipment, furniture, fixtures, etc.) Intangible Assets (e.g. patents, copyrights, etc.) Examples of liabilities Accounts Payable Wages Payable Debt Equity is the difference between assets and liabilities

BALANCE SHEET Example

INCOME STATEMENT

INCOME STATEMENT Composition Elements of the income statement Sales: Money earned Cost of Sales: Direct cost of your product/service Gross Profit: Sales less cost of sales (markup) Operating Expenses / SG&A: Selling, general & administrative expenses Interest expense: Interest incurred on debt Income Tax : Tax incurred on earnings Net Income: Gross profit less SG&A less interest & taxes there are STILL expenses even if you’re a copy writer at home… ie. if you join a co-working space (the hive).

INCOME STATEMENT Example

FINANCIAL PROJECTIONS Overview Before drafting your financial projections, consider the following: Anchor your analysis with what you know Historic data for your organization (if you have it) Data from other firms in your industry Start with the basics Use unit sales, per-head sales, or another “basic” factor of sales Differentiate between fixed costs and variable costs Forecast monthly for the first year and annually thereafter Be realistic

FINANCIAL PROJECTIONS Example Let’s take an example. You’ve started an online widget-selling business, and you need to create three year projections. Step 1: Projecting Sales Number of potential clients (e.g. monthly Google web searches) Number of website visitors for comparable retailers Average conversion rate of new visitors to consumers Number of return visitors Price Step 2: Projecting Growth Rate Consider marketing budget and marketing channel(s) Marketing ROI “Gut Check” your growth rate Is 2% reasonable? Is 2,000,000% reasonable? Do a google search of similar businesses for total potential visitors. 2. Research competitors in your industry at various stages of maturity. Use online resources to understand monthly web traffic early-stage ventures. Estimate conversion rate of visitors to sales and support this with market analyses from your industry. Estimate total return customers. Total customers going forward = return customers X (marketing spend * visit per spend). Growth Rate. Important to consider “how” you’re going to grow. Consider marketing budget and the ROI on that kind of marketing spend. Most websites / advertisers have great data with these statistics. Step back and gut check your growth rate and ask yourself if what you’ve developed is consistent with the growth rate of other peers in your industry.

FINANCIAL PROJECTIONS Example Step 3: Estimate Cost Structure Step 4: Calculate and Evaluate Fixed Costs: Calculate key financial metrics – are they realistic? Rent Web hosting Gross Margin Utilities Net Margin Accounting / Bookkeeping (very important) Customers / employee Advertising Personnel costs Variable Costs: Cost of Sales (widgets) Direct Marketing Packaging and shipping Start with fixed costs. Bookkeeping is important – assume $99/hour for Upsourced. Variable costs. Etc. Then take your monthly unit sales, your monthly variable costs (e.g. % of unit sale), your monthly fixed cost, and calculate monthly net income for the first twelve months. Then for year two and three, just estimate annual income rather than individual monthly income. Once you’ve got income, calculate key ratios. Are those ratios reasonable for your industry? Are they large enough to secure profitability? Are they unreasonably optimistic?

FINANCIAL PROJECTIONS Calculations Step 1: Projecting Sales Start with fixed costs. Bookkeeping is important – assume $99/hour for Upsourced. Variable costs. Etc. Then take your monthly unit sales, your monthly variable costs (e.g. % of unit sale), your monthly fixed cost, and calculate monthly net income for the first twelve months. Then for year two and three, just estimate annual income rather than individual monthly income. Once you’ve got income, calculate key ratios. Are those ratios reasonable for your industry? Are they large enough to secure profitability? Are they unreasonably optimistic?

FINANCIAL PROJECTIONS Calculations Step 2: Projecting Growth Rate Start with fixed costs. Bookkeeping is important – assume $99/hour for Upsourced. Variable costs. Etc. Then take your monthly unit sales, your monthly variable costs (e.g. % of unit sale), your monthly fixed cost, and calculate monthly net income for the first twelve months. Then for year two and three, just estimate annual income rather than individual monthly income. Once you’ve got income, calculate key ratios. Are those ratios reasonable for your industry? Are they large enough to secure profitability? Are they unreasonably optimistic?

FINANCIAL PROJECTIONS Calculations Step 3: Estimate Cost Structure Start with fixed costs. Bookkeeping is important – assume $99/hour for Upsourced. Variable costs. Etc. Then take your monthly unit sales, your monthly variable costs (e.g. % of unit sale), your monthly fixed cost, and calculate monthly net income for the first twelve months. Then for year two and three, just estimate annual income rather than individual monthly income. Once you’ve got income, calculate key ratios. Are those ratios reasonable for your industry? Are they large enough to secure profitability? Are they unreasonably optimistic?

FINANCIAL PROJECTIONS Calculations Step 4: Calculate and Evaluate Month 1 Start with fixed costs. Bookkeeping is important – assume $99/hour for Upsourced. Variable costs. Etc. Then take your monthly unit sales, your monthly variable costs (e.g. % of unit sale), your monthly fixed cost, and calculate monthly net income for the first twelve months. Then for year two and three, just estimate annual income rather than individual monthly income. Once you’ve got income, calculate key ratios. Are those ratios reasonable for your industry? Are they large enough to secure profitability? Are they unreasonably optimistic?

FINANCIAL PROJECTIONS Calculations Step 4: Calculate and Evaluate Years 2-3 Start with fixed costs. Bookkeeping is important – assume $99/hour for Upsourced. Variable costs. Etc. Then take your monthly unit sales, your monthly variable costs (e.g. % of unit sale), your monthly fixed cost, and calculate monthly net income for the first twelve months. Then for year two and three, just estimate annual income rather than individual monthly income. Once you’ve got income, calculate key ratios. Are those ratios reasonable for your industry? Are they large enough to secure profitability? Are they unreasonably optimistic?

FINANCIAL RATIOS For the Business Owner Gross Margin Net Margin ROE Average Collection Period Sales – Cost of Sales Sales Net Income Sales Net Income Total Equity Average Accounts Receivable Annual Sales / 365

FINANCIAL RATIOS For the Lender / Partner Fixed Charge Coverage Debt to Equity Quick Ratio Current Ratio Income (NOI) Fixed Charges or Debt Total Liabilities Total Equity Total Cash + Securities + A/R Total Current Liabilities Total Current Assets Total Current Liabilities

BOOKKEEPING How to do it Lose the paper and pencil, and try one of these options: Desktop Software Leading manufacturer – Intuit QuickBooks Sage Peachtree Online Software QuickBooks online Xero Wave Accounting Hire a bookkeeper Local CPA Firms In-house bookkeepers Online solutions hiring a bookkeeper- hire it if you don’t know what you’re doing. Benefits of spending money on a bookkeeper instead of paying for IRS penalties later. 

For Freelancers Perks: Flexibility Manage your own work Risks and Challenges: Uncertainty Additional accounting and admin burdens No paid time off

For Freelancers Top Tips for Freelancers: Separate your business and personal assets Obtain professional liability insurance Invest in an accounting software or hire a bookkeeper Budget for taxes (making quarterly estimated tax payments) Be prepared to pay 15% social security/medicare tax on all business income in addition to income tax Open an IRA

Common Write Offs Home office (expenses or %square feet) Mileage (expenses or %miles) Meals and Entertainment (50%) General Rule of Thumb: If you are spending money because of your business, that is generally considered deductible If you are spending money because you are a person, that is not considered deductible

Q&A “I work at a coffee shop, can I write off my coffee?” “I’m signing up to work at The Hive. Can I write off child care?” “How do I plan for maternity leave?” Most will have to do with write offs, so share a list of write offs commonly taken, or add a slide with write offs listed.

E-mail: info@upsourcedaccounting.com Feel free to reach out to us with any questions! E-mail: info@upsourcedaccounting.com Phone: (614) 972 7168 www.upsourcedaccounting.com