There is no greater feeling than enjoying the fruits of your labor. As a business owner, you pour passion and dedication, invest time, money, and energy to ensure your business succeeds. And as the saying goes, your efforts will pay off one day.
You’ll know when your hard work has paid off by checking different financial statements like cash flow statements, statements of owner’s equity, balance sheets, and income statements. If you want to know how much you can pay yourself as a business owner, owner’s equity is the detail to check.
In this article, we’ll discuss what owner’s equity is, the balance sheet details that come with it, and how you can spend your earnings once you’ve received it. Let’s begin!
What is owner’s equity? It’s the assets you own in the business, minus any liabilities. Owner’s equity is what it’s called if your business is operating on a sole proprietorship. It is called a stockholder’s or shareholder’s equity when a company is a limited liability company (LLC) or a corporation.
How to calculate owner’s equity? Again, owner’s equity is a company's assets minus its liabilities. The money includes your initial investment and business profit. Hence, an owner’s equity shows how much money you have left after paying all your expenses.
Owner’s equity can be positive or negative. Positive owner equity is when the assets are higher than the liabilities. It can be negative equity when the company's liabilities exceed its assets.
Although seen as excess money when the equity is positive, it is not considered a company asset but more of a liability as it is the money the company owes to the owner or the shareholder. Nevertheless, it is considered your asset once you claim it through an owner’s draw.
As a business owner, you work as hard as possible to see your business succeed. Long work hours are now a part of your routine as there are a lot of business areas you need to be on top of. Despite having many tasks you need to accomplish, do not forget to pay yourself. For you to gain more strength to run your business, give yourself fair compensation. How? Here are the ways!
If you are the company's sole owner and work more than 40 hours a week, an equity draw is the best payment method for you. Here, you can withdraw part or the whole of your owner’s equity. Before you decide how much to withdraw, it is best to check the total amount of equity there is.
If the owner's equity is negative, you can still withdraw money, but it will come from your business’s capital and will now be tagged as capital gains. Capital gains will reflect in your income tax returns and are taxable.
Meanwhile, if you have positive equity, you can withdraw any amount. These draws are also taxable despite not being included in the payroll. You still need to declare it in your income tax to pay the correct dues.
Owner’s draw can also be in non-cash forms, like getting a discounted purchase from company vendors for personal items.
If you want to receive a fixed amount regularly, it would be best to count yourself as a company employee. This way, you can include yourself in the payroll and receive a salary as scheduled. This payment is beneficial as you can receive monthly payments to sustain your personal needs. You can continue your business course without worrying about your expenses as your salary will cover them.
When you receive your monthly salary, you will be charged payroll taxes like a regular employee. Nevertheless, your salary will be categorized under business expenses, which can lower your net income and decrease the business’s taxes.
Guaranteed payments are a compensation form that works best for partnerships or LLCs. This payment method ensures you, your partners, or members of the company get paid whether the company has a positive or negative profit. For additional security, terms and conditions of guaranteed payments should be established clearly and written and signed.
A guaranteed payment isn’t taxable, unlike salaries and owner’s draws. A guaranteed payment is tagged as partnership income and categorized as a business expense. It lowers the company's net income and contributes to lowering the taxes your company has to pay.
Dividends are the company’s retained earnings and profits that can be given to you and to shareholders. Dividends are distributed to shareholders as a form of gratitude and to fulfill their purpose in investing, which is to get a return of investment. Continuous giving of dividends encourages shareholders to continue investing and partnering with you as they see the fruits of their investments. Note that dividends can be paid in shares or in cash.
To ensure the accuracy of your calculation of total owner’s equity and earnings, it is best to rely on bookkeeping and accounting software like QuickBooks, Xero, and Sage50 cloud. To begin with, these tools track all the inflow and outflow of cash in your company through bookkeeping. It will automatically compute your company’s assets and liabilities, which are crucial to getting the correct computation of your equity.
A bookkeeping and accounting software can also generatereports and financial statements automatically. Whether you choose owner's equity, a shareholder's equity, to be a part of the payroll, guaranteed pay, or dividends, you know what amount you and other shareholders will receive. When you know exactly how much you will get, you can plan how to spend your earnings wisely.
Once you’ve determined how you will get your share of money from the company’s profits, make sure that you also know how to spend it wisely. Here are some ways to do just that!
Experience the rewards of your hard work by spending your owner’s equity, salary, guaranteed payment, or dividends on yourself. You can use it to pay for your needs and wants. Since you are now a business owner, you can also make the most of your income by enrolling in programs and training that will help you become a more efficient business manager.
Of course, you cannot go wrong with the famous 50-30-20 budgeting hack to ensure you spend your money wisely. Allocate 50% of your income for your expenses, 30% for your wants, and 20% for your savings.
It is standard for businesses to get loans to increase the money they can use for business operations. Getting loans can also spike your company's money in case you are planning for growth.
However, interest rates are increasing, so one way to spend your income wisely is to assist your business in paying liabilities owed. Once you’ve paid off your loans or credit card debt, you can allocate your succeeding income and company profit to the needs of your business operations instead of paying interest.
You can get plenty more benefits from paying debts, like improving your credit score and less stress on your end because you won’t have any interest and debt worry moving forward.
You can grow your business using the money you earn in different ways. First, you can let your income be retained and not claim it. In doing so, your business will have extra money to use for operations.
You can also withdraw the money and invest it in improving your business, like purchasing new office or factory equipment, investing in new software, or giving back to your team. Forms of giving back include skills and knowledge development and team building activities that promote employee wellness and company culture.
These forms of giving back will benefit your business as you have tools to optimize your operations and a motivated workforce.
You are now knowledgeable about owner’s equity, how to pay yourself as a business owner, and how to spend your earnings wisely. Remember that equity is the money a business owes to the owner or the shareholder and can be calculated by subtracting liabilities from assets.
Aside from equity, there are other ways to pay yourself including salaries, guaranteed payments, and dividends. To ensure accurate calculation, it's recommended to use bookkeeping and accounting software. Finally, remember the several ways to spend your earnings wisely, including paying off debts and investing in growing your business.If you need assistance generating financial statements, knowing owner’s equity, or in bookkeeping, partner with us at Unloop! Let us help you track, monitor, and understand your finances so you can make informed decisions. Contact us now!
There are a lot of reasons why bookkeeping and accounting are business essentials. Through proper financial management, you can track all the money coming in and out of your account. With all this data, you can calculate many details about your business finances, including your net income.
Net income may be a single detail in an income statement, but it means a lot for your business. Hence, you must know all about it.
In this blog post, we’ll dive deeper into the different methods you can use to calculate net income, why you should always be aware of this number, and what you can do after knowing your net income. Let’s go!
The basic formula for calculating net income is Income - All Company Expenses. Though this formula is straightforward, what makes it challenging is the details you need to track, as expenses include the costs of goods sold, selling costs, operating and administrative expenses, asset depreciation, and tax payments. The good news is that methods are available to make your tracking and calculations easier and more accurate.
Bookkeeping and accounting have evolved from using Excel sheets to using automated software like QuickBooks, Xero, and Sage50 cloud. Although Excel sheets are still used today, it is more efficient to invest in software as they are less prone to errors.
A bookkeeping and accounting software automates data acquisition from channels like ecommerce platforms, payment gateways, banks, and other applications. With software, there’s no need for manual input which minimizes errors.
Software also calculates automatically through built-in formulas, unlike Excel sheets where bookkeepers or accountants still need to add formulas to get results. Though the formulas may be correct, any error in linking cells can make the process more complicated and error-prone.
Through a software’s dashboard, you can easily see updates about your net income and many details about your business finances. You can also customize reports and generate them in just a few clicks.
You can also delegate net income calculations to experts. Many bookkeeping and accounting firms have experienced professionals to handle your account. You can skip the hassle of learning the ropes of using software and let them do it for you as they use the same reliable tools. You’ll also have more time to manage your business with the peace of mind that qualified professionals are handling your books and accounts.
Aside from calculating net income, trained bookkeepers and accountants can also generate essential accounting reports like balance sheets, income statements, and cash flow statements to calculate net income. They know how to calculate net income from a balance sheet and other reports efficiently.
With experts on board, your only tasks will be to check the accuracy of the details on the books, check reports, and use the data you get in decision-making for your company.
You already know that net income comes from deducting all your business expenses from your company’s income. Now, see the different reasons why you should always get the net income calculation correctly, and why you should give importance to this detail. What does net income signify, and what does it say about your business?
In computing net income, you’ll primarily see your business’s gross income. You’ll know whether you are hitting your sales target or not. If you see positive numbers, you’ll know your strategies are working. You can identify the best practices, so you can keep on doing them. On the other hand, if you see that you are not hitting your sales goals, you can strategize to change the situation.
Part of the reason you are not getting the net income you are aiming for is high expenses. Look into the details of your expenses and pinpoint the culprit of your high expenditures. See whether there are ways to lower costs to increase net income.
The net income reflects profitability, so it must be every business owner’s goal to see positive numbers. Though it takes work to turn your business into a profitable one, the efforts are worth it because it is through profitability that you can ensure that your business thrives.
Since net income reflects your company’s profitability, it is among the first things investors will look at. Investors help grow your business through their investment, but they will only do so when they see that your business can maintain a stable income. A stable income shows that when they invest in you, their investments will return and grow.
If your business has shareholders, you’ll get their share from the net income. This share is called the dividend. You can agree on how often to send dividends, but it is common practice to send out dividends twice a year. The higher the net income, the higher the amount you and your shareholders will get. You and the shareholders have the option to reinvest this money to fuel the business’s growth, or spend it outside the company.
You’ve invested time, money, and effort to get the net income you’ve incurred, so it is just right to plan how you’ll spend it. To make the most of that money, these are the different things you can do.
Running a business means a lot of tasks to think about, including monitoring your business finances and net income. Net income reflects your company’s profitability which investors look at. It is also what you need to check in order to determine whether your business plans are working or not. And, of course, your net income defines your business success.If you are looking for help in net income calculation or bookkeeping to track all of your income and expenses, you can partner with us! We at Unloop have a team of experts to handle your financial tracking. Contact us now so we can discuss the details of our services and offers with you.
Your financial statements are one way to know how well your business is doing. However, some things are just inevitable, such as errors. Whether you make financial statements manually or generate them through accounting software, there's always a window for mistakes. That's why preparing financial statements should be handled with extra care.
A small mistake in financial statements can have enormous consequences. However, understanding how things go wrong can help business owners fix and prevent these errors. Let's look into the common mistakes with business reports, so you know what to do when your numbers don't match.
Before we start discussing the pitfalls of financial statements, it is also crucial that you know when a problem occurs. Here are some questions you need to ask to help you determine inconsistencies and errors in your business statements.
If you answered no to one or more of these questions, there might be something wrong in the process or the reports themselves, and you should start addressing them.
Sometimes, no matter how carefully small business owners prepare their reports, mistakes still seep in. Here are mistakes you should look for in different financial statements.
Data entry is the most common and frequent error that could happen in financial statements. Among the most typical mistakes made when entering data are:
It's always best to have two copies of your important financial statements to compare them side by side. Furthermore, you can assign personnel to double-check the entries to guarantee that there are no inconsistencies.
Some businesses choose to produce single-columned reports, which are short in comparative data. Including the company's current assets and previous vital data points will give a better insight into the business's financial position.
Financial reports such as income statements and expense reports should contain comparative data. It will help you see if your business generated more sales than in other months so you can adjust your strategies. It goes the same for your expenses. It always helps to compare your current and previous expenses to see if you're going overboard to look for ways to save your resources.
An error of commission happens when you mishandle data and enter it in the wrong place. In this error, you still enter the correct amount. The inconsistency happens when you put it in the wrong category. For example, you make a sale of $100 from your products, and you accidentally put this in your expense column.
You will see a decrease in your inventory but not an increase in your sales which can confuse you when the report comes out. It will also make your expense report higher than usual. Small amounts may seem insignificant, but they may turn your finances into chaos when it's consistently happening.
Making financial statements will be pointless if no one takes the time to read and study them. Aside from understanding what the numbers mean for your financial performance, inspecting them to look for suspected errors is also crucial.
To help spot errors in profit and loss statements, balance sheets, and other important business reports, every person that receives the reports should:
If the administration can’t find solutions to the errors in the report, it's best to hire someone who can help you sort out and correct the errors in your financial statements.
Errors in your financial statements will be ever-present if you don't look for the root cause of the errors. Revising some of your accounting procedures can help decrease and eliminate these errors.
For example, most data entry errors, such as omission or mishandling, stems from doing them manually. If you have a small business, manually recording income and expenses or making cash flow statements are a piece of cake. But regular and accurate recording will prove much more challenging as your business grows.
In its place, you can invest in accounting software to eliminate errors in your data entry. Revisit all your accounting procedures and make adjustments to ensure recurring errors in your reports can be eliminated.
Financial ratios are essential to assess your business activity. It will help you pinpoint potential problems before it does considerable damage to your business. For example, suppose your account receivables grow from 25 days to 30 and 35 days over a specific period. In that case, it can signify that some of your customers still have pending cash payments or you must catch up on collection responsibilities.
Calculating financial ratios should be done with the three main financial statements— income statements, balance sheets, and cash flow statements. By doing this, you can spot discrepancies and address potential problems.
Some mistakes are small and easy to remedy, but some are harder to spot and significantly damage businesses. Here are some consequences that come with erroneous reporting.
Proper bookkeeping is critical to creating accurate financial statements. Fortunately, there is an expert ecommerce accounting service that can help small businesses like yours. Unloop offers all-around accounting services for ecommerce businesses.
For your financial statement needs, Unloop's bookkeeping services have got you covered. Our bookkeeping services include the following:
Financial statements say a lot about the overall financial health of your business. Ensuring they are accurate and complete with all essential data points is a top priority. We hope this list of common mistakes helps you be more careful of your errors.
In addition, if you need professional accounting help, Unloop offers other services such as accounts payables, forecasting, payroll, and taxation. Book a call with us today!
It is impossible to determine your business's annual revenue to the exact dollar. However, high-quality revenue forecasting is necessary for every business. Forecasting allows your business to respond to challenges and prevent significant losses from happening.
Revenue forecasting is a difficult task, and if you are not well-versed in how to forecast revenue, many challenges will hinder you from creating an accurate revenue forecast for your business. Understanding where things could go wrong will help you improve your forecasting results and overcome potential difficulties.
A clear picture of the average revenue helps businesses make strategies to cater towards their growth. However, many factors affect the success of the forecasting process. Here are the biggest challenges in revenue forecasting and how to solve them.
The foundation of revenue forecasts is data points. Inadequate or worse, incorrect data basically makes your revenue projections useless. If something is inconsistent about your forecasted revenue, it's always best to go back to the data you gathered.
Obviously, improving your data gathering is the solution to this challenge. But how do you do it? Investing in forecasting software is the best way to eliminate the dangers of human error when gathering data for forecasts. If possible, you can assign a dedicated team to make sure all the data you have are valid.
You can project how much revenue you will have based on a specific period. For some businesses, annual forecasting is the most common way to see future revenue. However, you can make revenue predictions for five or even ten years.
The challenge starts with forecasting range. The shorter the time period, the more accurate the forecast you can get. Longer ones are more challenging since several unforeseen factors can affect your business revenue.
It's up to the business owner to decide the time period. But to avoid inaccurate forecasting, we recommend sticking to annual forecasts so that predictions reflect expectations and realities.
Historical data is vital to create a revenue forecast. For example, your business has grown consistently at 10% in the last five years. You can predict that your business will still grow at 10% in the following years.
However, if your past performance varies, using historical data is useless, and you may want to try other revenue forecasting methods. Furthermore, using past data is not available for start-ups. In some situations, past data won't affect forecast revenues because of several external factors. Always take note of considerations when using historical data.
In plain view, wrong computations are easy to fix and prevent. You'll be surprised how many revenue forecasts go wrong because of simple arithmetic mistakes. Wrong computation stems from the lack of attention to detail. If you're using software or Excel sheets, double-check all data entries and formulas to guarantee accurate results.
A business can use several forecasting methods to determine their company's revenue. Choosing a financial modeling method is vital for an accurate prediction, and most business owners fail to consider the data they have at hand before going through the forecasting process.
There are four primary forecasting methods:
Choosing the correct method starts with studying underlying patterns in your earnings. Don't be tempted to go the easy and short way if you want an accurate forecast.
Not all businesses invest in forecasting, but a growing business should take advantage of forecasting to continue growing and make informed decisions for the improvement of the company.
Here are some benefits of proper forecasting for your business.
In business, there's always room for improvement. When you do forecasting, you can see which area to improve to propel your business to success. Furthermore, forecasting can identify problems early before they can cause irreversible damage to businesses.
According to research, businesses that do regular and correct forecasting are 10% more likely to grow and outcompete their direct rivals.
It's one thing to say that your business is doing great but seeing the number gives you a clearer picture of how well you are doing. For example, your business has had a stable income of $300,000 annually in the past years. Your current revenue forecast shows that by the end of the year, your sales forecast will go up to $500,000.
The numbers show how many resources you can use for other business operations. Likewise, if your sales forecast drops, you can see precisely the deficit, and you can strategize how to bring your numbers back up.
It's not enough to know that you want high sales, you have to identify the actual sales you want to achieve, and forecasting can provide you with the exact figures you want to reach. According to forecasting science, 97% of businesses who do forecasting reach their sales quota.
In contrast, for businesses that rely only on strategies and not maximizing forecasting, only 55% of them reach their sales goal by the end of the year.
Revenue forecasting helps businesses attain sales efficiency by giving an insight into your customer's behaviour. By predicting your future sales, you can adjust your prices accordingly, roll out your advertising, and make time for product development.
Forecasting can show the period when your sales will spike. You can maximize the information to increase your inventory and generate more sales for your business.
One of the reasons you should do forecasting is to help you manage your cash flow efficiently. The forecast can help you plan your payments and avoid delays and penalties. It also lets you see when customers' payments are coming into your business, so you strategically allocate your business resources.
Efficient cash flow management builds trust between your employee and suppliers. It can also help you negotiate properly when you need credit for paying your personnel or new business ventures.
If you don't have experience with forecasting, you'll find it complicated to forecast revenue. Fortunately, Unloop offers forecasting services for small businesses looking to scale and assess their financial health.
Our forecasting services include:
Forecasting revenue is essential if you want to continue scaling your business. However, forecasting is on the complicated side of accounting. We hope this blog post helps you plan better for forecasting.
If you need more accounting services, Unloop offers bookkeeping, accounts payable, and payroll. Book a call with us and talk to an expert for free!
As an aspiring entrepreneur, launching a business is often one of the biggest decisions. As exciting as it can be to embark on this journey, it also requires careful consideration and planning. If you are looking for success, financial planning and forecasting should be part of your startup strategy. Taking control of your finances from the beginning is essential for the health and growth of any business venture. It’s what separates successful companies from those that fail in their early years.
This blog post discusses why efficient money management through financial planning and forecasting is the key to helping your startup business succeed. Keep reading!
As the name suggests, financial forecasting predicts how your finances will look in a given time period. Forecasting is usually made annually and based on historical data for objectivity and accuracy.
Note that forecasts aren’t 100% correct, and they are always subject to change, especially if there are new variables that pop up during the fiscal year. Nevertheless, it pays to invest in forecasting, especially if you are a startup. Here are some benefits of financial projections.
No matter how limited the historical information is for new businesses, it helps if you still base your financial forecast on any of the past data you’ve gathered. This practice ensures that you have bias-free, objective, and accurate forecasting of future income, expenses, savings, profits, and trends.
Just note that there is a higher chance for beginning businesses to have forecast changes, as owners are testing the waters. Nevertheless, the forecast is still a good guide in the decision-making process.
It’s exciting to know how much you’ll be earning in the next year! Knowing these details brings a lot of benefits like the following:
With your knowledge about your income comes the visibility of your future expenses. If you spend the same amount as you spent from the period you derived your data from, you are likely to have the same income.
If you already have a large income, this is good news. All you need to do is to maintain the best practices and keep expenses to a minimum to maintain your high income. However, if you want to raise your revenue, you’ll get the chance to take a closer look at the areas where you can minimize the costs.
Have you successfully saved in the previous year, or was it a challenge? As a startup business, it’s a bit of a struggle to begin saving, but you can still make it a goal and achieve it for the coming year. To successfully do this, financial forecasting will be of great help.
When you know your income and expenses in advance, you’ll know your net income. Net income is calculated by deducting the total expenses from your total income. Then, you can plan on how much of this net income will go to your savings.
Months and quarters with low income, high expenses, and the inability to hit revenue goals can happen. Some of the expenses which can turn into roadblocks when left unmanaged are the following:
Financial challenges will be reflected in numerical form if you do financial forecasting. You can pinpoint specifically what the culprit is and can plan how to manage it better moving forward.
Financial forecasts are beneficial for your knowledge and a helpful tool for you to gain more investors. As a startup business, having individuals willing to invest in your business keeps you from having large loans. Interest fees can hurt your business more than you know. Your investors will also likely be well-versed in the ecommerce industry and the products you sell. You can benefit from this expertise.
If you see your business working hand-in-hand with investors, a financial forecast can help gain their trust. This report lets them know if your company is worth investing in.
Financial planning is essential to all businesses, especially for startups like yours. The plan serves as a guide, so all your financial decisions are not made blindly. A forecast and a financial plan are always intertwined. The latter will be the means for you to bring the forecast to life or improve the outcome of that report. Through a well-thought-out financial plan, you can reap all these benefits.
Financial planning allows you to set clear future goals and ways to achieve them. Through it, you can create step-by-step annual plans on how to maintain a profitable company, maintain or increase income, save, set financial plans for profit, and see when you can expand your growing business.
You can practice strategic decision making because you have visibility on all your assets and an idea of the possible costs. Hence, your actions will be directed towards spending less and earning more.
Your income trend in the forecast will remain in numbers unless you work for it. If you continue the techniques of your current operation, you are likely to achieve the same earnings as the previous years you got your data from. However, if you are ready to step up, you at least have a base point through the forecast. You can be as creative as possible with the plans you suggest to increase your business income and revenue, or attain the highest profit possible.
Looking at your expenses closely is the key to ensuring that you make the highest income. The lower your expenses, the higher your income will be. As a startup business, here are some helpful tips you can follow:
Challenges are a constant in running a business, especially when you are just starting up. For instance, you will see which months sales become stagnant. In this case, you can heighten your marketing and advertising beforehand to avoid it from happening. You will see how much taxes you are to incur in certain periods, so you can control travel expenses, utilize retirement and health insurance benefits, check qualified deductions, and deduct charity contributions. Many more roadblocks can be proactively addressed or kept at bay with a forecast and proper strategic planning.
Having investors for a startup business is a great help in ensuring you have enough capital to launch and keep your business running. Showing your financial forecast is putting your best foot forward, but telling them about your financial plan shows your confidence. Your plan shows that the financial data will not just stay in the books but will come to life. As a result, investors will be more encouraged to invest their money in helping your business grow.
Preparing a financial forecast will help any new business succeed in the long run. It's essential to get valuable insights on how much income you'll bring in and what your expenses will be, and can even predict any roadblocks that could come up. A financial forecast is also key when pitching your business to investors—it shows that you're confident and have a clear plan for the future.
If you need help in getting started, our team at Unloop can assist you with forecasting and planning so that you can set your business up for success. Let us help you work on the limitations of financial planning and forecasting and make the most of these tools. Contact us now, we’d love to assist you!
Business accounting involves evaluating the past performance of your business and determining how well your business is thriving. However, peeking into your business's future performance is equally essential. It allows you to plan accordingly to ensure that your business runs smoothly and can withstand potential issues along the way.
Financial forecasting is a way of predicting a business's future financial position using historical data gathered from reports like cash flow statements, revenues, expenses, and sales data. We'll talk about the various forecasting techniques in this article to assist you in evaluating the performance of your company.
Many factors can affect your business, some of which you have no control over. However, financial forecasting allows you to see potential scenarios, so you are ready when they happen. There are two types of forecasting methods: qualitative and quantitative methods.
We go over some of the most popular techniques in each area so you can better comprehend them.
Qualitative forecasting bases its predictions on experts' and customers' responses rather than using historical data. This method is valuable for new businesses with no data to begin with.
Here are some examples of qualitative methods.
An expert's opinion is simply asking an individual or group of experts about the subject matter, which they will give predictions on according to their knowledge. In order to make the most accurate prediction possible, an expert should offer opinions without bias. From there, business executives will decide if they want to go with the suggested actions.
Business owners may bring more than one expert to collaborate on their predictions. But, of course, it is up to the administrators to decide which expert opinion to follow. They can solely rely on experts for future planning, or they can do other methods and consider other factors that may affect the business.
Market research is commonly used to determine the market needs of a certain product or service. The entire addressable market and the company's current clients are used in this strategy to collect data. Market research uses customer surveys, analyses of metrics for current campaigns, testing, and research on your competitors' marketing strategies.
Market research needs large data as much as possible to eliminate human bias. This method requires a lot of time, effort, and resources to deploy. However, if done correctly, you'll get the most accurate financial forecast possible.
The Delphi method is similar to experts' opinions, except it is more systematic and structured. In this method, you will still need experts for their insight, but instead of giving them the freedom to make predictions according to their knowledge, they will need to answer several questionnaires until the business comes up with a forecasting model.
Qualitative forecasting helps executives make informed business decisions like determining how much of their inventory to keep, hiring more people for their company, or applying adjustments to their sales operations. Qualitative forecasting methods are also used to develop projects and marketing campaigns highlighting the business's products and services.
All businesses can perform qualitative forecasting, but here are some industries that will greatly benefit from qualitative forecasting.
Quantitative financial forecasting is a data-driven forecasting method that businesses use to make accurate predictions for big decisions. This form of forecasting uses historical data to analyze patterns to determine what the business performance will be like in the future.
Quantitative forecasting results are affected by past data, relevant variables, and time parameters. You can do this financial forecasting for budget, sales, or projected expenses for a future time period. Here are some examples of quantitative forecasting methods.
The simplest quantitative forecast you can use is the straight-line method. This method only needs an approximate projected growth rate of your business which is usually based on your past performance.
The straight-line method predicts your business's future by calculating your previous and projected performance. For example, in the last three months, your sales have been $300,000 in total, and for the coming three months, you are projected to increase by 5%, so you can calculate your future revenue by:
300,000 x 1.05 = $315,000
So, for the next three months, you predicted sales growth would go up to $315,000.
The naive method is the best financial forecasting method if you want calculations to be as simple as possible. The naive method suggests that your business performance will be the same as in the past. For example, if your business made $500,000 in sales last year, according to the naive method, your business will generate the same amount of sales this year.
This prediction does not consider any seasonal trends or other factors that could affect your business. So this type of prediction can easily change when something major happens within a specific period.
The seasonal index method analyzes patterns in data points by separating months of the year into seasons. In most cases, seasons are divided into four quarters:
Q1: January, February, and March
Q2: April, May, and June
Q3: July, August, and September
Q4: October, November, and December
Experts calculate past seasonal index scores to determine how your business will perform in the future. For example, in the last two years, your seasonal scores were:
2021: Q1 (58) Q2 (60) Q3 (55) Q4 (70)
2022: Q1 (62) Q2 (54) Q3 (65) Q4 (60)
Your projected seasonal index score from the two data points will be:
2023: Q1 (60) Q2 (57) Q3 (60) Q4 (65)
After getting the projected seasonal index scores, you can go on with creating a forecast for your business performance.
This method is used to forecast the revenue of a business in a specific period. Revenue run rates are calculated based on previous data and assuming your sales rate will continue at a certain pattern given a specific period.
For example, your business made $50,000 in the first quarter of the year. Using the revenue run rate method, you will assume that you will generate the same amount for every quarter. Hence, your total revenue for a year will be $200,000.
Gathering data and creating inferences using quantitative methods help you draw more accurate predictions. More than accuracy, using the quantitative method provides:
There is no doubt that business forecasting methods help administrators and stakeholders make better business decisions. Whether you choose a qualitative or quantitative method, taking a peek into your future ensures that you will be ready to take on your business's future.
If you're serious about doing business predictions, Unloop offers forecasting for businesses. Our service gives you a tailor-made forecasting model to drive your business to success. So what are you waiting for? Book a call with us today!
It's no secret that accurate forecasting in accounting is critical to a company's long-term success. But predicting future revenue growth can be difficult—particularly for small and medium businesses with little to no data. In this post, we'll take a look at four popular revenue forecast models and show you how you can use real data to predict your future revenue growth. Let's get started!
Generally, in accounting, financial forecasting refers to the process of predicting future financial outcomes based on past data and trends. Accountants use financial forecasting to plan for upcoming expenses, budget for future projects, and make investment decisions.
Revenue forecasting is the procedure of evaluating a business's future sales. This is typically done using historical data, such as past sales figures, economic trends, and demographic information.
Forecasting can be used to make short-term predictions about the company's growth rate (such as quarterly or annual sales) or long-term predictions (such as 5-year or 10-year sales projections).
Revenue forecasting is important because it can help businesses make informed decisions about the future. For example, revenue forecasts can set expense and budget targets, help businesses price products, and give insights for hiring decisions.
Additionally, forecasting can help businesses track their progress towards long-term goals and identify potential problems early on.
There are four main types of revenue forecast models: historical trend analysis, regression analysis, market share analysis, and economic indicators. Let's take a closer look at each model.
Historical trend analysis is the simplest and most common type of revenue forecasting. This method uses past sales data to recognize trends and predict future sales.
Businesses first need to gather data on past sales figures. This data can then be used to create graphs and charts that show how sales have changed over time.
Once the data has been collected and visualized, businesses can look for patterns and trends that might indicate future growth. For example, if sales have been steadily growing over the past few months, they will likely continue to increase in the future.
On the other hand, historical trend analysis can help businesses identify potential problems and adjust if sales fluctuate or decline.
Regression analysis is a more sophisticated revenue forecasting model that uses mathematical models to pinpoint relationships between distinct variables. This model is often used in conjunction with historical trend analysis.
To conduct a regression analysis, businesses first need to collect data on past sales figures and other relevant variables (such as price, advertising, and economic conditions). This data can then be used to create a mathematical model that predicts how changes in the independent variables affect sales.
Regression analysis is a powerful tool that can help businesses understand the drivers of their sales and make more accurate predictions. However, it is important to note that this method requires a significant amount of data and can be complex to implement.
Market share analysis is a common revenue forecasting model in the business world. This method estimates a company's future sales by analyzing its market share. To do this, businesses first need to gather data on their past sales figures and the overall size of their target market. This data can then be used to calculate the company's market share and predict how it will change in the future.
Market share analysis is a relatively simple method of revenue forecasting that can be used with limited data. However, it is important to note that this method only estimates future sales and does not consider other factors (such as price changes or economic conditions).
Economic indicators analysis is another common model of revenue forecasting. This model uses economic data to predict how economic changes will affect sales. To do this, businesses will need to gather data on relevant economic indicators (such as GDP, inflation, and unemployment). This data can then be used to create a model that predicts how economic changes will affect sales.
Economic indicators are powerful variables that can help businesses understand the drivers of their sales and make more accurate predictions. However, it is important to note that this method only provides an estimate of future sales and does not take into account other factors (such as price changes or market conditions).
The best revenue forecasting model for your business will depend on several factors, including the type of business you have, the amount of data available, and the resources (time, money, etc.) you are willing to invest.
If you're just starting out, it's probably best to stick with a simple method like market share analysis or historical trend analysis. These methods can be used with limited data and don't require complex mathematical models.
As your business grows and you collect more data, you can start to experiment with more sophisticated methods like regression analysis or economic indicators. Implementing these methods will require more time and effort but can provide more accurate predictions.
One of the most common mistakes businesses make when forecasting revenue is failing to account for all relevant variables. This can lead to inaccurate predictions and, in some cases, complete failures.
Other common mistakes include:
It's important to use recent and relevant data when forecasting revenue estimates. Outdated data (from two years ago) can be misleading and lead to inaccurate predictions.
Seasonality refers to regular patterns of demand that emerge at predictable times of the year. For example, retailers may see a spike in demand during the holiday season, or an outdoor equipment company may see an increase in sales during the spring. By accounting for seasonality, businesses can better anticipate peaks and troughs in demand and plan accordingly.
Seasonality is a major factor affecting sales projection, so it's important to account for it when you forecast revenue.
The price of goods and services is just one of many variables affecting sales. Other variables include economic conditions, market conditions, customer behavior, and more. By relying too heavily on one variable, businesses can make inaccurate predictions about the future.
No matter which model you use, always make sure your forecasts are realistic and backed up by real data. This way, you can be confident in your predictions and plan for future growth accordingly.
Are you looking for help forecasting your company's revenue and cost of goods sold (COGS)? If you're an inventory business based in the US or Canada, Unloop can help!
We use revenue forecasting software to track and calculate historical data that will help you assess your budget, revenue, and unprofitable points in your business.
Book a call and talk to us, we’d love to discuss the future of your business with you!
Amazon is the biggest platform to sell products across the globe, but with every financial venture, taxes are just around the corner to lessen the hard-earned income of Amazon sellers.
As an Amazon seller, you're obligated to make a sales tax collection for every purchase. But the good news is that dropshipping is among the few eligible ventures for Amazon Tax Exemption Program (ATEP). In this blog post, we'll show you how to get tax-exempt on Amazon in minutes. Keep reading to learn more!
If you're planning to resell products online, you'll need a sales tax permit, which will allow you to collect sales tax from items sold. But, in this case, it allows you to apply for Amazon Business's Tax Exemption Program.
In most states, registering for a sales tax permit is relatively simple and can be completed online. Let's help you get started.
Having all of your ducks in a row from the beginning is important as a business owner. This will ensure that you can always correctly identify yourself and your business when dealing with government agencies or financial institutions.
Double-check if you have the following proper documentation for your online business.
This government institution is responsible for collecting taxes and administering tax laws. Every state has a Department of Revenue, and each oversees taxation within its borders.
To register your online business, visit your state's Department of Revenue website and click on the Sales and Use Tax Section. You can easily read through and complete all the necessary info to get your sales tax permit.
You're one step closer to getting your tax exemption status approved now that you have your sales tax permit. Next is heading over to your Amazon account and applying the following steps.
Under US law, online sellers make sales tax collection in states with a physical presence or nexus. Amazon has used this loophole to its advantage, systematically avoiding collecting sales tax in most states.
There are states dropshippers can get Amazon tax exemption from, so be sure to click on them when applying for it.
You will notice that some places are not included in Amazon business tax-exempt. It's because these states do not levy sales taxes.
Meanwhile, avoid clicking on the states that require you to upload state-specific permit numbers and additional information. Instead, only select them if you have the required tax exempt documentation for the following states.
After picking the states you are applying for Amazon tax exemption in, input your small business's information from its name to the type of property you sell. This includes your sales tax permit and other tax exempt documentation.
Double-check everything, and you'll be directed to a page where you will sign your Amazon tax exemption certificate. Finally, click Activate Certificates. Your Amazon tax exempt status will take effect in 15 minutes, whereas Amazon Business will upload the Amazon Tax Exemption Certificates within 24 hours.
If you're looking to start a dropshipping business or are already in the throes of running one, it's important to stay compliant with sales and income tax laws. As an Amazon seller, one way to do this is by applying for sales tax exempt status. To qualify, your business must resell items to learn how to use tax-exempt on Amazon.
Unloop can help you through the process and make sure everything is filed correctly so you can continue earning profits without worrying about penalties from the government. Are you ready to get tax-free income? Book a call today!
Outsourcing tasks for different areas of your business can be beneficial, especially when you're not well-versed in doing such things. Countless professionals and trained individuals are ready to offer their services to small businesses. But before hiring one, assess your business first. Which professional would be most helpful for your business?
When it comes to finances, you can get a bookkeeper or an accountant to help you. Does it make a difference when you hire the other professional over the other? Can they perform the tasks your business requires?
If you're thinking about hiring someone, you've come to the right place. We'll list the different responsibilities of bookkeepers and accountants so that you can hire the proper help for your growing business.
Hiring a trained professional to help you manage your business means allocating resources to pay them. But, of course, you want your hard-earned money to be worthy of the service you are getting. So let's look at the different responsibilities of accountants and bookkeepers to help you differentiate their tasks.
Certified bookkeepers do need a formal accounting degree to perform their job. However, bookkeepers are trained and do not need state-mandated exams and certifications to do their job. On average, a bookkeeper’s rate starts at $30 per hour.
Here are the responsibilities bookkeepers carry out.
Whether cash flow comes in plenty or slows down, keeping track of everything that comes in and out of your business is a way of telling if your business is doing good. Part of a bookkeeper's job is recording transactions in sales and expenses that happen in your business.
Modern technology means automated bookkeeping software, making it easier for bookkeepers to record your data. Moreover, bookkeeping software instantly produces summaries of your transactions whether you want data monthly, quarterly or annually.
It's common for small businesses to have suppliers instead of producing their own goods. Of course, you need to pay the suppliers for the goods they manufacture for you. You can work with several suppliers if your company sells a variety of goods. It's the bookkeeper's duty to make payments to your suppliers. They can also make payments on behalf of your business for other necessary expenses.
In addition, as they make payments for your business, they are in charge of the collection. They send invoices to your clients to ensure all payments are done on time. They also record if payments and receivables come in late to ensure that your sheets remain balanced.
Businesses produce several financial statements. The data on these statements can tell if your business is stable or on the verge of failing. Bookkeepers prepare these financial statements for accounts to analyze.
Balance sheets, cash flow statements, income statements, and statements of equity are a few crucial financial documents that bookkeepers offer.
A bookkeeper's service may vary, and it can include processing payroll. For small businesses, bookkeepers can perform some duties of the HR department. For example, they can assist in processing paychecks and ensure employees get their pay accurately and on time.
A certified public accountant goes through a rigorous accounting degree and must pass state-mandated licensure examinations before they can offer their services. A certified accountant's average rate is between $50-$100. It can go higher depending on their work experience.
Here are a few of the major duties held by qualified accountants in small businesses.
It's the accountant's role to make sure all data in the business's financial records are valid and accurate. Accountants are in charge of tracking any inconsistencies in the statements and pinpointing any problems. They will also be in charge of consulting with a bookkeeper when they see these inconsistencies.
Once everything is verified, accountants will be the one to answer if auditors check on your business. They also present these statements to stakeholders and potential investors to help with your business’s growth.
If bookkeepers record the cash flow in a business, the accountant makes sure you pay up correctly—especially taxes. Taxation is an important part of business, and you must comply with tax laws to run your business legally and smoothly.
Accountants are in charge of filing all tax returns for your business. Tax filing is done quarterly or annually, depending on the rule of your country's tax collection agency. Accountants ensure that you file and declare taxes on time so you won't have to pay fines and other unnecessary expenses.
An accountant can examine your business’s financial records to make an informed guess or forecast your business’s future. Aside from your records, there are other methods accountants can do to predict the direction of your business. For example, the market research method uses how many people are potential buyers when a product is launched. This information can help you significantly enhance your sales.
Other forecasting methods may include factors like GDP, economic factors, trending, and data models, which can be used for long term forecasts. Furthermore, accountants can help you plan your business's next step. Risk assessment allows you to see if your actions will benefit your business growth.
Many small business owners tend to go big and be reckless with their decisions, causing failure. Accountants will be able to strategize with you along the way so your business resources won’t go to waste. Their financial advice will help you allocate your resources to the right department.
Small businesses strive to make their processes more efficient to lessen their expenses. Budgeting within the business process is also in the job description of an accountant. They can pinpoint the areas of your business with unnecessary expenses which they think you can lessen.
Accountants can help you save money and allocate them to the other areas of your business you can improve on.
The difference between bookkeeping and accounting may be hard to spot as they both focus on the financial aspect of the business. But, to simplify, you can look at bookkeepers as individuals that keep all financial transactions in an organized record. In comparison, accountants are the ones to analyze and interpret the data.
So which one is better for a small business? As you start, bookkeeping will be easier for you to handle. In fact, you can attend training to be a certified bookkeeper. You can meet with accountants once in a while to help you manage your financial data. As your business grows and more cash flows into your company, then it may be a good time to hire both.
For trusted bookkeepers and professional accountants, book a call with Unloop and talk to our professionals. We offer many different accounting services that fit a small business’s budget.
There's no question that keeping your online business healthy is essential for its success. But which report can help you know if your business is doing okay?
An income statement example can give you a detailed overview of your company's financial health and help you identify areas that need improvement. How can you prepare a comprehensive income statement for your business?
In this blog, we'll discuss the parts of this crucial financial statement. We will also give examples of income statements that are helpful for your online business. Let's dive right in!
One of the essential financial statements for any business, including online businesses, is an income statement. It shows your revenue, expenses, and net income for a month, three months, and so on. You can use the income statement to assess your small business’s health and make forecasts about its performance.
Perhaps, you're confused by the following names. You shouldn't be, as these statements are all income statements.
By comparing cash flow period after period, you can get a good sense of how your business is performing. For example, if you see that your revenue is increasing, but your expenses are also rising, you'll know it's time to make some changes to your budget.
Income statements can also help you measure your strength in sales, see how much leftover money you have, and determine what expenses to cut back on. You can use this document to secure investments or loans. So, if you're not regularly making income statements, now is the perfect time to start.
Now that you understand the importance of having this statement as one of your financial reports, it's time to learn how to make one for your online business.
As an ecommerce business owner, you might have already invested in accounting software with templates for these financial statements. But here's what you should remember for the income statement format: headings.
The headings typically include:
For instance, your business might report its income statement for the fiscal year ended December 31, 2022 in US dollars. Plus, the heading may also include other disclosures, such as whether the statement is prepared on a GAAP or non-GAAP basis.
After compiling all of your transactions into their correct charts of accounts, you can choose whether to prepare an income statement using a single-step or a multi-step income statement.
So, what is an example of an income statement using the first approach? The single-step income statement computes all your revenue and expenses in a single calculation of net income. Thus, it reports revenues and expenses that are easy to understand.
Net Income = (Revenue + Gains) – (Expenses + Losses)
Below is an example of an income statement with this approach.
MPOM Pet Supplies
For Month Ended June 30, 2021
(in US dollars)
|Revenues + Gain|
|Total revenues and gains||$61,400|
|Expenses + Losses|
|Cost of goods sold||$22,200|
|Bank & ATM fees||$22|
|Marketing and advertising expenses||$1,100|
|Income tax expense||$14,500|
|Minus: Total expenses and losses||$50922|
While a multi-step income statement subtracts operating expenses from gross profit to net income. Non-operating accounts, such as interest expense or gains on the sale of investments, are then subtracted or added to arrive at the final figure for net income. Thus, a multi-step income statement provides a more detailed picture of a company's profitability.
Gross Profit = Net Sales - Cost of Good Sold > Operating Income = Gross Profit - Operating Expense > Net Income = Operating Income + Non-Operating Items
Below is an example of an income statement using the multi-step approach.
MPOM Pet Supplies
For Month Ended June 30, 2021
(in US dollars)
|Cost of Goods Sold (COGS)||$22,200|
|Bank & ATM fee||$22|
|Marketing and advertising expense||$1,100|
|Minus: Operating Expenses||$10,222|
|Add: Capital gains||$4,400|
|Minus: Interest expense||$4,000|
|Earnings Before Income Tax||$20,578|
|Minus: Income Tax Expense||$14,500|
Do you want to evaluate your profits over several periods? Then, a comparative income statement will give you a larger view of your business's finances.
It combines information from several income statements into a single statement. This makes it easy to compare your business's performance from different periods side-by-side. You can also compare your income statements with your competitors as an official document open to the public.
By comparing your small business's income statement from one year to the next, for instance, analysts can get a clear picture of its financial health.
MPOM Pet Supplies
For Years Ended December 31
|(In thousands of dollars)|
By now, you may realize the three main sections of an income statement—the revenue, the expenses, and the net income. This income statement format is simple enough. However, businesses have different ways to earn income, such as sales from goods sold or services, and spend their cash, such as administrative expenses.
Common items found in any income statement are:
This is the first line item you'll put on your income statement. It represents the total cash your online business has earned in a year, for example. Remember, your revenue is different from profit. Profit is determined by subtracting your total expenses from your total revenue. So, in the sample income statement, MPOM had $57,000 in sales and $50,922 in expenses. Thus, its profit would be $10,478.
This item is your business's direct costs from manufacturing your products or honing your services. This item includes the cost of materials, overhead costs, training, and labor used to produce the goods.
But COGS does not include indirect costs, such as shipping or marketing. The COGS formula is
COGS = beginning inventory + purchases - ending inventory
All businesses should aim to reduce their COGS to increase profitability. You can accomplish this by negotiating better deals with suppliers or manufacturing products more efficiently. Generally, the lower a company's COGS, its profits will be higher.
Total sales minus the cost of goods sold is your gross income or profit. Then, you evaluate your gross profit margin. This metric is the ratio of your gross profit to your total sales. You can use the gross profit to recognize your online business's financial health and pricing strategy.
For instance, if you have a high gross profit margin, you are selling your products at a higher price than your competitors. Meanwhile, you are overspending on production costs if you have a low margin of gross profit.
What expenses maintain your business door open? Also known as the general and administrative expense, an operating expense involves expenditures that don't directly relate to making your products or services. It commonly includes:
EBIT, or earnings before interest and taxes, measures your business's profitability. It essentially represents the company's operating income or the amount of money it makes from its core business activities before deducting interest and taxes.
Taxes are government-required expenses, and interest is the cost of your borrowings, such as cash loans.
Other income is a category on the income statement that includes interest income and gains on the sale of assets. For example, you can receive revenue from bank interest while adding the income from selling your equipment or tangible assets to your final profit.
The final figure in an income statement is the net income or net profit. It shows how much money you will actually get after deducting all of your expenses. To calculate net profit, you subtract your total expenses from total revenue or your taxes and interest expense from your EBIT.
If the result is positive, the company has made a profit. If the result is negative, your business incurs a net loss. Net income can fluctuate from month to month or year, depending on various factors such as sales revenue, direct cost, and interest rates.
As an online entrepreneur, it's important to keep a close eye on your finances. After all, you can't continue your operations without a good bottom line.
One of the best ways to stay on top of your finances is to prepare an income statement and analyze it. If you need help interpreting your numbers, don't hesitate to ask Unloop for our professional advice, ensuring that your business will always be profitable.
If you have a financial tool on hand, pair it with our easy income statement template. Download it now!
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting.. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.