Accounting Basics and Startup
Considerations
expertise.
Ed Street, CPA/ABV/CFF, CVA
Principal, REDWLLC
Matt Doxtator, CPA, CIA, CFE
experience.Senior Associate, REDW
and
Adjunct Faculty Member, UNM
LLC
November 13, 2015
The information provided herein is for informational purposes only and should not be construed as financial, investment, tax, accounting or legal advice.
expertise.
Financial Statements
• Balance Sheet
The Accounting Equation:
– Assets - Liabilities = Equity
– A house with a mortgage illustrates all three
• Income Statements (Statement of Operations)
– Income - Expenses = Net Income
– Net income flows from income statement to equity on balance sheet
expertise.
Financial Statements
• Cash Flow Statement
Cash from Operations
+/- Investing Activities
+/- Financing Activities
“Cash is King.” – every business ever
expertise.
Elements of the Financial Statements
• Assets
• Liabilities
• Equity
– Investments by owners
– Accumulated earnings/losses
– Distributions to owners
•
•
•
•
Revenues
Expenses
Gains
Losses
expertise.
Financial Statement Elements
• Revenue vs. Receipts
• Expenses vs. Expenditures
expertise.
Accrual Basis vs. Cash Basis
• Accrual Basis
– Revenues based on when they were earned
– Expenses based on when they become obligations (when they
are “incurred”)
• Cash Basis
– Revenues based on when they are received
– Expenses based on when they are paid
expertise.
Ratio Analysis
• Liquidity Ratios
• Activity/Turnover Ratios
• Leverage and Coverage Ratios
• Profitability Ratios
expertise.
Sources of Comparative Data
• North American Industry Classification System (NAICS)
http://www.naics.com/search.htm
• The Risk Management Association (RMA)
http://www.statementstudies.org/
• First Research Industry Profile
http://www.firstresearch.com/
expertise.
Projections and Forecasts
• What is a projection?
• Why is it important?
expertise.
Projections and Forecasts
• Elements of a Projection (or Forecast)
– Sales Forecast
– Expense Forecast
• Fixed Expenses (General and Administrative Costs)
• Variable Expenses (Direct Costs)
– Production Forecast
– Break Even Analysis
• Fixed costs/revenue per unit - Variable cost per unit
– Assumptions
expertise.
Projection vs. Forecast
• Financial Forecast – prospective financial information
that presents expected financial position, results of
operations and cash flows based on conditions expected
to exist and actions expected to be taken.
• Financial Projection – prospective financial information
that presents expected financial position, results of
operations and cash flows based on one or more
hypothetical courses of action.
expertise.
Cash Conversion Cycle (CCC)
The time it takes to convert resource inputs into cash flows.
Components:
1.
Inventory Conversion Period (Days Inventory Outstanding - DIO)
2.
Time needed to collect receivables (Days Sales Outstanding – DSO)
3.
Days Payable Outstanding – DPO
CCC = DIO + DSO - DPO
expertise.
Accounting Related Risks
• Credit Concentration
• Supplier Concentration
expertise.
Cash Flow Projection
• Cash Receipts
• Cash Disbursements
expertise.
General Forecasting Tips
•
Forecast revenue on a range of scenarios
–
•
•
•
•
•
High and low sales price and sales volume
Start with expenses
–
Fixed first
–
Variable second
Identify your assumptions
–
How much will the market grow/shrink?
–
Changes to competitors
–
Impact of tech advancements
–
Avoid bias
–
Write them down
Find comparisons – is my forecast plausible?
Over-estimate advertising expenses
Really over-estimate legal and professional costs
expertise.
Startup Costs
• Work Space
– Down Payment
– Deposit
• Equipment
• Supplies
• Inventory or Materials
• Receivables (initial operations/cash conversion cycle)
expertise.
Startup Costs
• Legal Costs
– Legal entity set up
– Licenses
– Insurance
– Patent expenses
• Communications
• Utilities (may require a deposit)
expertise.
Startup Costs
• Market Research
• Advertising
• Website
expertise.
Don’t Forget Taxes!!
• NM Gross Receipts Tax
• Payroll Taxes
• Self Employment Tax
• Estimated Income Tax Payments – Corporate and
Personal
expertise.
Advice from the Pros
• Tim Nisly
– Founder and long-time curator of TEDxABQ
– CEO of Rio Grande Community Development Corp.
expertise.
Advice from the Pros
• Ron Patel
– Managing Partner, Delivered Dish
• Successfully merged once already
• 7 markets and growing
– Owner, Albuquerque Sol Professional Soccer Team
expertise.
Ed Street, CPA/ABV/CFF, CVA
REDW Principal
505.998.3228
estreet@redw.com
Matt Doxtator, CPA, CIA, CFE
REDW Senior Associate and UNM Adjunct Faculty Member
505.998.3426
mdoxtator@redw.com