Managing your business\u2019s finances and revenues can be a full-time job, so much so that you may need to create a financial position or hire an outside accounting firm to handle these duties within your small business. However, many small business owners choose to handle this aspect of their businesses themselves, foregoing the help of an accountant to manage the company\u2019s balance sheet and business transactions.<\/p>\n\n\n\n
If you\u2019re a small business owner who chooses to monitor your company\u2019s cash flow with your own two eyes, there are financial accounting equations that you should be familiar with. These fundamental accounting equations are rather broad, meaning they should apply to an array of businesses. The equations will provide you with the figures you need to understand the viability and health of your business and to make more informed business decisions.<\/p>\n\n\n\n
Whenever you post a transaction, you should practice double-entry accounting. Double-entry accounting requires you to post debits on the left side and credits on the right side of a ledger. The total dollar amount of debits and credits always needs to balance. All of the following equations stress the importance of double-entry bookkeeping.<\/p>\n\n\n\n
The equation: Total Assets = Liabilities + Equity<\/strong> <\/p>\n\n\n\n This is a basic balance sheet equation. The dollar amount of assets on the left side of the equation must equal the sum of liabilities and equity on the right side of the equation.<\/p>\n\n\n\n The equation: Net Income = Revenues \u2013 Expenses<\/strong> <\/p>\n\n\n\n By subtracting your revenue from your expenses, you can calculate your net income. This is the money that you have earned at the end of the day. It\u2019s possible that this number will demonstrate a net loss when your business is in its early stages. The ultimate goal of any business should be positive net income, which means your business is profitable.<\/p>\n\n\n\n The equation: The break-even point tells you how much you need to sell to cover all of your costs and generate a profit of $0. Every sale over the break-even point will generate a profit.<\/p>\n\n\n\n The equation: Cash Ratio = Cash \u00f7 Current Liabilities<\/strong> <\/p>\n\n\n\n This ratio gives you an idea of how much cash you currently have on hand. It also demonstrates how well your business can pay off its current liabilities. The higher the number, the healthier your company.<\/p>\n\n\n\n The equation: Profit Margin = Net Income \u00f7 Sales<\/strong> <\/p>\n\n\n\n When you divide your net income by your sales, you\u2019ll get your organization\u2019s profit margin. Your profit margin reports the net income earned on each dollar of sales. A high profit margin indicates a very healthy company. A low profit margin could indicate that your business does not handle expenses well.<\/p>\n\n\n\n Remember that your net income is made up of your total revenue minus your expenses. If you have high sales revenue but still have a low profit margin, it might be time to take a look at the figures making up your net income.<\/p>\n\n\n\n The equation: Debt-to-Equity Ratio = Total Liabilities \u00f7 Total Equity<\/strong> <\/p>\n\n\n\n A high debt-to-equity ratio illustrates that a high proportion of your company\u2019s financing comes from issuing debt, rather than issuing stock to shareholders. If you\u2019re attempting to secure more financing or looking for investors, a high debt-to-equity ratio might make it more difficult to find creditors or investors who are willing to provide funds for your company.<\/p>\n\n\n\n The equation: The costs of goods sold equation allows you to determine how much you spent to manufacturer the goods you sold. By subtracting the costs of goods sold from revenues, you\u2019ll determine your gross profit.<\/p>\n\n\n\n The equation: Knowing how to calculate retained earnings allows owners to perform a more in-depth financial analysis. The statement of retained earnings allows owners to analyze net income after accounting for dividend payouts. Owners should calculate the statement of retained earnings at the end of each accounting period, even if the amount of dividends issues was zero.<\/p>\n\n\n\n A thorough accounting system and a well-maintained general ledger<\/a> allow you to properly assess the financial health of your company. There are many more formulas that you can use, but the eight that we provided are some of the most basic accounting equations.<\/p>\n\n\n\n Although these basic accounting equations seem straightforward, they can become more complicated in reality. Many small business owners find it much more challenging to balance the right side of the equation with the left side of the equation when factoring in the potentially hundreds of accounts they have in their company.<\/p>\n\n\n\n Fortunately, our firm <\/a>can help with the complexity of it all. We offer small business consulting<\/a> and accounting\/ bookkeeping services.<\/a> Having a professional assist or even take over your accounting tasks can be rewarding with increased revenues and profits. It will allow you to utilize your skills, talents and expertise better and have the growth of the business advance more rapidly. Please contact us<\/a> to see if we can be assistance to your business financial health. <\/p>\n","protected":false},"excerpt":{"rendered":" Managing your business\u2019s finances and revenues can be a full-time job, so much so that you may need to create a financial position or hire an outside accounting firm to handle these duties within your small business. However, many small business owners choose to handle this aspect of their businesses themselves, foregoing the help of […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[114,67,23,71,115],"tags":[119,97,120],"yoast_head":"\n2. Net income<\/h2>\n\n\n\n
3. Break-even point<\/h2>\n\n\n\n
Break-Even Point = (Sales \u2013 Fixed Costs \u2013 Variable Costs = $0 Profit)\ufeff<\/strong> <\/p>\n\n\n\n4. Cash ratio<\/h2>\n\n\n\n
5. Profit margin<\/h2>\n\n\n\n
6. Debt-to-equity ratio<\/h2>\n\n\n\n
7. Cost of goods sold<\/h2>\n\n\n\n
Cost of Goods Sold = Beginning Inventory + Cost of Purchasing New Inventory \u2013 Ending Inventory\ufeff<\/strong> <\/p>\n\n\n\n8. Retained earnings equation<\/h2>\n\n\n\n
Retained Earnings = Beginning Retained Earnings + Net Income or Net Loss \u2013 Cash Dividends\ufeff<\/strong> <\/p>\n\n\n\nMonitor your company\u2019s financial health<\/h2>\n\n\n\n