1. Introduction to Accounting
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2. 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

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

4. 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

5. 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:

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

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

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

9. 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

10. BALANCE SHEET Example

11. INCOME STATEMENT

12. 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).

13. INCOME STATEMENT Example

14. 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

15. 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.

16. 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?

17. 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?

18. 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?

19. 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?

20. 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?

21. 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?

22. 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

23. 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

24. 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. 

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

26. 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

27. 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

28. 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.

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