Friday, 27 November, 2020

How a company’s accounting works

Understanding Company Accounts

If you are an entrepreneur or a business person, it is natural that, maybe it won’t a lot of attention to your company’s accounting, for a very simple reason: There are other, much more exciting aspects in the day-to-day business, for example, taking care of the business brand, the relationship with its consumer, the price of your product, the sales strategy, disclosure, people’s leadership, much more emotional aspects, much less rational than accounting that nourish the entrepreneur’s daily life. But it is essential to understand the role of accounting in the life of your company or how much that accounting tells you about your company, how much she tells other people as well. And here I will allow myself to give a little class accounting for you to understand what is your company in financial terms or for those outside the business as a supervisor, an auditor, a potential investor, a bank, what that person sees in your business when looking at accounting. When your accountant sends documents to you, documents to be signed, he is simply not fulfilling a tax obligation. If there was a negotiation with a slightly more consultative role, an appreciation of the role of the accountant, surely you would have reports that would translate better the information that runs in your company, because, day by day, when the entrepreneur does not value the activity or the accountant’s service, will usually hire the cheapest service of an accountant who will not have much interest day-to-day of the company, which will provide standardized information, who will send documents that do not say a lot about the company.

In the same way, the entrepreneur who doesn’t understand anything about accounting, will receive these documents, simply ask the accountant “where do I sign” and comply with a tax obligation. Now if you pay attention to the information that the accountant can provide for you, you’re going to have a set of information that will tell you if the company is going or not in the right direction. Want to prove it? Think about the documents that a consultant, for example, would ask you upon arriving at your company, requested by you to guide what needs to be done to improve the company’s financial situation, so that it makes more profits. The first documents that this consultant would ask for would be the company’s balance sheet and the income statement. The balance sheet is nothing more than a financial portrait of the company, the income statement is perhaps a description of the information flow during a certain period: where does the money come from, where does the money go, if there is, if not. In practice, what the consultant is wanting to see is a detailed strategy information that you have in the business, and then you will see on the screen here, a representation of a part the most important document of the company’s accounting, which is the balance sheet.

When the consultant looks for all the company’s assets, I’m not describing any information of the assets you see on the screen, but it’s a box that represents. Imagine that every millimeter you see on the screen represents a value in reais. Let’s say you have a 1 million reais company. Each millimeter is a fraction of that million reais. The description of the assets is nothing more than the description of the strategy that you applied to your business. What kind of strategy? Have more cash or less cash, have more stocks or less stocks, have more accounts receivable or less accounts receivable. For example, if you sell more on credit there will be a very large volume of accounts receivable. To have or not to have its own structure, you can have your shed, you can rent a shed, you can have your delivery vehicle, you can rent a delivery vehicle. What the consultant will see in the set of assets is what you did with the money that was at your disposal.

Let’s say you’re starting a franchise of something, a food delivery franchise, and that you can have the feature description that was separated to have the food stock, packaging inventory, a resource that you’ve allocated to pay the down payment for a vehicle, to buy land where you park this vehicle, where you do your service, provide your services, in short, you have values ​​that were made available by the company and that were allocated as it is there in the asset. If you look at the other side of the balance sheet, that on the screen appears what would be the liability side and equity, you will have a description of the origin of this money that is in the company’s assets. So make it clear, the asset is the real equity, it is the value that is in the company, is the set of resources that are available to the entrepreneur.

The side you see to the right of the balance sheet, the information to the right of the balance sheet do not exist, they are just facts that portray where the money that is there in the company came from. So, if the liability says that you have accounts payable to suppliers, is a commitment that you have, but the fact that you haven’t yet paid a fee to your supplier, means that the money is in the company, is active, or stopped at the cashier, or in stock, or in accounts receivable, somehow that money is allocated. The fact that you didn’t pay taxes to the city hall that expire at the end of the month, the fact that you didn’t pay the energy bill, the fact that you have not paid a loan to the bank, means that that money and finance is in the company, circulating, generating activity and promoting revenue generation, and probably profit. Now, if you consider what part of the money is in the company is the company’s own money, part of the money is only there because debts and commitments have not yet been paid, when you consider, in this reading of the balance sheet, that the money that is there, not owned by the company, at some point it will come out, I have a notion that what is left of this resource or what is left of the values ​​that are circulating in the company it is a company’s own value.

Consider that the asset is equity, remove that asset size from assets, that volume of resources corresponding to what is not of the company, what’s left is debt-free equity or net of debts. If you have a very accurate, quantified accounting, you can, every day, every second, if you have a good information system, quantify your company’s value. It generated more results, accumulates more profit in the company, accumulating more profit, you pay what you owe and what remains remains circulating in the company. A healthy company will be continuously producing a growth in its net worth. Why does the entrepreneur build this strategy? Why it is an asset, puts that asset to work in your daily life? He’s wanting to generate results for his life, then there is the other document, the income statement which shows the result of applying that strategy. What was the revenue, what were the revenues that company obtained, what were the costs the company obtained, expenses she had to perform the activity? What’s left of those inputs and outputs is the so-called profit that many entrepreneurs believe, falsely, which is its part, which is the result that fits you, that profit is the entrepreneur’s part.

It is not! From profit you have to make another decision to keep or not keep that profit in the company and increase or not increase investment in your asset, on your assets. And it is important to consider that if you, one day in your life, stopped to decide what to do with the resource you had, could have invested in government bonds, in stocks, in real estate, he decided to set up a business. Why did you decide? Probably because you identified that business the opportunity to create more wealth than you would create by investing in real estate, investing in stocks. So, if you have it there, in your asset strategy, which is the best investment you have identified in your life, it should be natural for you to realize that it would be very healthy, very timely, invest part of your profit in your company, why? Because by doing this you are increasing the size of the investment, you are creating that necessary dynamic in any type of investment which is to grow in a compound way over time. The idea of ​​interest on interest is compounded.

If I buy an apartment for R $ 100 thousand and selling for R $ 120 thousand I can’t take R $ 20 thousand and take a trip with my family. The ideal is for me to buy, now with R $ 120 thousand something I sell for R $ 140 thousand, Then I buy for R $ 140 thousand what I can sell for R $ 180 thousand. If I’m buying for R $ 1 million, I will sell for R $ 1.1 million. This growth spiral, this growth dynamic, is what makes an investor richer over time. The entrepreneur will get rich if he is able to identify the opportunity to use part of your profit to reinvest in the purchase of a new asset, building more inventory, buying perhaps a computerization service for your company, training for your employees, in short, reinvestment will allow to create value in this business and make this business profit more, after all, he has a strategy set to work.

It is essential that you, the entrepreneur, realize that a business will only be successful if you have this growth spiral, that is, I start with a certain heritage, I end the month with a bigger equity, and I will continue to multiply the growth of my assets over time. If you don’t, probably a little more insightful entrepreneur you will realize your hesitation, will notice the opportunity to open, maybe a business competing with yours, in front of your business, close to your business, to attract your customer, and then, it will generate a profit similar to yours, will not use all the profit, will reinvest that profit in the growth of its activity, employee training, training, in computerization, dissemination, will attract more consumers, in a second moment, it will attract even its consumers.

That entrepreneur with the vision of reinvestment will grow and leave you in the dust, maybe even extinguishing your business. So don’t forget that a healthy business is a business that receives continuous reinvestments and that grows in a spiral form, even to gain a lead in front of competitors and not arouse the greed of another entrepreneur who will notice your hesitation, after all, with spiral growth there will be no hesitation in the activity, there will be growth, continuous profit and certainly continuous rewards for its business partners. May you be very successful in putting it into practice, very successful in business.

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