Mighty Digits on LinkedIn: In our last post we talked about how to improve your cash flows Today, we… | 18 comments (2024)

Net Income vs Cash FlowsThese are 2 crucial metricsbut despite having some overlap…they can be entirely different➡️ What is Net Income?Net Income represents your total profitability…down to the last pennyit is calculated by taking all income accounts on your P&L - all expense accounts on your P&LThe official formula isRevenue → what amounts you are recording as income (ex: saas revenue, product income)[-] COGS → The cost to carry out your revenue (ex: cost of hardware, hosting & servers)[-] Operating Expenses → the cost to run your operations (ex: payroll, advertising & marketing)[+] Other Income → income earned from source outside of your core business model (ex: interest income, points from credit cards)[-] Other Expense → expenses incurred from sources outside of your core business model (ex: interest expense, depreciation)note that some of the example above may show in different sections for other business, as it all depends on what your core business model is➡️ What are Cash Flows?Cash flows are pretty much what they sound likeThey represent the total cash movements in your bank account from one period to the nextThe official formula is the sum ofCash from Operating Activities → cash movements from your P&L activities, and movements in your current assets/liabilities (ex: prepaid expenses, accounts payable, accounts receivable)[+] Cash from Investing Activities → cash movements from items the business invests in, mostly related to fixed & intangible assets (ex: machinery & equipment, office furniture, patents)[+] Cash from Financing Activities → cash movements from items related to financing the business (ex: taking out a line of credit, raising equity, paying off debt)➡️ OK, so how do they relate?Well…your net income is the starting point for calculating your cash flows If you had no movements in any of your balance sheet accounts…Your net income would equal your cash flowsbut it’s almost a given that you would have changes in your balance sheet accounts➡️ So why would they differ?Consider the followingexample 1 → you charge customers net 30 (this affects your AR)example 2 → you purchase raw materials that you have yet to convert to COGS (this affects your inventory)example 3 → you purchase office furniture (this affects your fixed assets)example 4 → you take out a $300k loan (this would affect your liabilities)all of these examples would affect your balance sheet, and not your P&L…hence causing a differenceThat’s our take on Net Income vs Cash flowsGot anything else to add?Let us know in the comments below 👇PS: Need help with your business finance & accounting? We can help you with that, and so much moreLearn more here:https://bit.ly/47dbyWR

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Income vs ExpensesThey are the Yin and Yang of your P&LAnd the represent the complete opposite from one anotherLet's start with the definition...1️⃣ What does Income & Expense mean?➡️ Income means amounts generated from sales➡️ Expenses means amounts consumed2️⃣ Where are Income & Expenses found?They are both on the P&L➡️ Income can be found in the Revenue, and Other Income section➡️ Expenses can be found in the COGS, Opex, and Other Expense section3️⃣ How are both recognized?➡️ Cash Basis means income is recognized when cash is collected, and Expenses are recognized when cash is paid➡️ Accrual basis means income is recognized once it’s EARNED, and Expenses are recognized once they are INCURRED4️⃣ What are the journal entries?They both feed into your Owners Equity on the balance sheetWhich means Crediting is good, Debiting is bad➡️ Income goes up with a credit, and down with a debit➡️ Expenses go up with a debit, and down with a credit5️⃣ What are some common examples?➡️ Income - Subscriptions, Product Income, Consulting Income➡️ Expenses - Advertising & Marketing, Hardware COGS, Payroll6️⃣ What are some commonly associated accounts?➡️ Income - Deferred Revenue, COGS, Cash, Accounts Receivable➡️ Expenses - Accounts Payable, Accrued Expenses, Cash, Credit Card, Prepaids7️⃣ What are some things to also keep track of?➡️ Income - Measure your Gross Profit, and ensure you are collecting cash quickly➡️ Expenses - monitor all recurring charges, and be mindful of when you have AP that’s coming due8️⃣ What are some things to watch out for?➡️ Income - Don’t mix up Revenue (from your core business) with Other Income (non core activities), or vendor refunds (which should be a negative expense, and not income)➡️ Expenses - Don’t mix up COGS (cost to deliver your product / service) with Opex (cost to run your operations), or Other Expense (costs not related to COGS or Opex), or capitalized items that go on the balance sheet (like inventory, or fixed assets)That’s our take on Income vs ExpensesWhat would you add?Let us know in the comments belowPS: Looking for some more Finance & Accounting help? That’s what we do best:Learn more here:https://bit.ly/47dbyWR

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Budget vs ActualsThis is by far our favorite report…and is also one of our most downloaded templatesIf we had to present just one report to a CEO, it would be this onethere are few reports out there that add as much value, and communicate as much understanding as a budget vs actuals report.📣 Follow along with our Budget VS Actuals Excel template over here:👉https://bit.ly/49BTrM9Let’s cover what’s so special about this report…but first… let’s start with some definitions:➡️What is a Budget vs Actuals report?A Budget vs Actuals report allows you to compare what you THOUGHT was going to happen……to what ACTUALLY HAPPENEDThis can be anything in the business, though a profit and loss is most commonly includedNext…➡️ Why is this our favorite report?A number of reasons:1️⃣ It Adds CredibilityThe biggest thing you can do to add credibility with this report is to have a STORY for every line…➡️ Explain what happened➡️ Explain what you thought would happen and why➡️ Explain how the 2 differ…or ideally, are aligned 🎯Of all the exciting feelings I’ve had in our career…Accurately predicting what would happen has been amongst the top2️⃣ It Allows you to Aggregate the most important KPISThere are a million and one financial reports out there…The Budget vs Actuals is often concise, showing all the key takeaways from the largest areas of the businessThe truth is a budget vs actuals report can be as detailed as you wish…Our favorite method is to start on a summarized level, and then drill deeper into details where needed3️⃣ You can prepare it with nice DESIGN 🤩Unlike a Profit & Loss or a Balance Sheet… A Budget vs Actuals often includes various graphsThese graphs give you the opportunity to explain what’s happening more easilyand allows you to add value to the presentation with some pretty designDon’t undermine how much value stunning design to add to a financial report!➡️ Some Other TipsWhen preparing a Budget vs Actuals…here are our favorite items to keep in mind:1️⃣ Show GOOD variances as POSITIVE, and BAD variances as NEGATIVEThis will help the reader quickly grasp what’s going well, and what’s not going wellThat means your revenue variance should be Actual - Budget…while your expense variances should be Budget - Actual2️⃣ Include both a $ variance, as well as a % varianceWhen either of these are used in a vacuum…you can’t really tell the significance of the variance3️⃣ Create the report in a way where you can easily drop it into a board summaryThat means ensuring the dimensions are just perfect…where you can copy, and paste as picture into your slide deck===Those are our reasons for why the Budget vs Actuals is our favorite reportWhat do you think about the Budget vs Actuals report?Let us in the comments below 👇PS: Don’t forget to download Budget VS Actuals Excel template via the link at the middle of the post to follow along

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Everything you need to know about Forecasting Revenue 👇Your revenue build is the most important area of your forecastIt's the area where you'll spend the most amount of timeAnd the area that can contribute the largest to your cash flowsRevenue builds are like snowflakes ❄No two are the sameBut there are certain patterns & similarities you can use...Your projected revenue can come from any of the below 3 sources➡ 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐄𝐗𝐈𝐒𝐓𝐈𝐍𝐆 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫𝐬These are customers who are already using your product / service.Here you'll want to understand when their contracts are up for renewal, and forecast out churn, expansion, and contraction➡ 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐏𝐈𝐏𝐄𝐋𝐈𝐍𝐄 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫𝐬These are potential customers who are currently in your CRM, and you feel can close in the near futureHere you'll want to forecast out your sales from these customers by taking their projected close date, multiplied by a close likelihood.It's common to attach a close likelihood based off of the stage they are in➡ 𝐑𝐞𝐯𝐞𝐧𝐮𝐞 𝐟𝐫𝐨𝐦 𝐍𝐄𝐖 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫𝐬This is where the real heart of your forecast lies - forecasting sales from customers who you've never spoken to, but can reasonably expect to close in the future via your business modelIt's here where you'll ask yourself the most fundamental questions on your business model❔ How do you acquire customers? Is it via sales reps? ad spend? partnerships?❔ How long do customers stay with you? A month? a year?❔ What products/services do they purchase once they convert to paid customers?❔ Do they repurchase/renew? Do they expand / contract along the way?❔ How are other areas of your financials affected, like Deferred Revenue, Accounts Receivable, Commissions, etc?Your revenue build will be the largest area an investor will focus,and they'll want to see strong evidence that you have a tight grasp on your business modelGet it right, and you gain the crucial visibility that your startup needs to scaleGet it wrong, and you run the risk of losing your 2 most precious resources...time & moneyWhat other suggestions would you add for forecasting revenue?Let us know in the comments belowPS: Looking to create a forecast? Our team can help with that, and so much more:https://bit.ly/3tQTEKO

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Debt vs EquityBoth can fund your businessBut each mean something completely different from the otherLet’s start with some definitions…➡️ What does it mean to raise Debt?Raising debt means you received money with the expectation that you will pay back the amount, almost often with interestIt is a liability (since it’s something you owe to a creditor)and is CAPPED…that is, there is an exact amount that you owe➡️ What does it mean to raise Equity?Raising equity is when you receive money, but this time in exchange for ownership in your companyThis means that you have a type of liability to the new owner, but this time it’s UNCAPPED…as it involves giving a share of the profit & loss / sale of the company awayThis would show up in the Owner’s Equity section of your balance sheet➡️ What are the Pros & Cons of raising debt?Raising debt can be a great way to inject capital into your business if you are comfortable with repaying the amounts with interestBusiness owners who are bullish on the future of their business may have no problem raising debt, since they feel confident they will be able to use that capital to generate an even stronger return than what they will pay in interestThe cost of the interest + the schedule in which you agree to repay the loan however may catch up with you, leaving you in a difficult position if things don’t go as planned➡️ What are the Pros and Cons of raising equity?Raising equity can often times be a great way to raise capital without having to repay the amounts…let alone the lack of interest paymentsOften times an equity owner will also be a proud contributor to the management of the company, yielding the company both with capital as well as expertiseIt can come at a steep cost however, as you no longer have as big of a pie to share in the profitsEquity owners may also get voting rights, ultimately controlling the direction of the company...which can cause problems if you are not aligned➡️ When should you raise debt, and when should you raise equity?While every business is subjective, our 2 cents are:Raise debt when you feel confident that you have a proven formula for generating a large ROI with the capital, and the interest is lowRaise equity when you feel there is a fair valuation for the company, and you are aligned with the person who wants to become an equity holder in your businessThat’s our take on raising debt vs equityWhat would you add?PS: Looking for an expert to help guide you on raising debt vs equity?We can help you with that and much more..Learn more over here:https://bit.ly/47dbyWR

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FREE ebook on Structuring your Finance & Accounting function the right wayOver 80+ pages of financial wisdom to help you run your business better!We’re excited to announce today the launch of our ebook on how to structure your Finance & Accounting function.This took us hours and hours to write…and years and years to practice.📌 Download the free ebook right here:🔗 https://bit.ly/49ZdJOTThere is SO MUCH to this topic, so here’s a preview:➡️ What is a part of your Finance & Accounting function?Your Finance & Accounting function often times includes the following:📅 Bookkeeping & Month End Close💸 Accounts Payable📄 Invoicing👥 Payroll💰 Taxes📊 Financial ModelingLet’s do a quick overview of each:1️⃣ BOOKKEEPING & MONTH END CLOSEEach month, you need to perform what’s known as a “Month end close”.This process refers to finalizing your financial statements by importing transactions, classifying transactions to the right category, performing bank reconciliations, and booking journal entries.2️⃣ ACCOUNTS PAYABLEAccounts Payable represents the amounts that you owe to vendors for goods and services.The key with AP is to use an AP platform to ensure that your AP process is efficient, as well as secure.3️⃣ INVOICINGInvoicing is the other side of Accounts Payable, and is often times referred to as Accounts Receivable.Here, you’ll want to ensure customers not only receive their invoices in a timely manner, but are also followed up with frequently on any outstanding balances.4️⃣ PAYROLLPayroll is a very sensitive function, and involves onboarding employees, and managing paychecks.Don’t mess this one up! Keep a backup sheet handy that shows the details of each paycheck ahead of processing.5️⃣ TAXESLike it or not, the government will tax you. Whether that’s income tax, sales tax, payroll tax…the list goes on and on.Be sure to file your taxes correctly or you’ll be hit with penalties and interest!6️⃣ FINANCIAL MODELINGAhh…our favorite. Your Financial Model is the most vital tool in your Finance & Accounting function as it allows you to understand both where you’ve been, as well as where you’re going===We hope that you enjoy this free ebook, and run your Finance & Accounting function more efficiently after reading.Got any suggestions on how to structure your Finance & Accounting function?Let us know in the comments below 👇

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The Month End Close Checklist ✔️Closing out your books can take a loooong timeand there can be a LOT of steps in evolvedBut if you keep a strong check list…you can ensure that you never miss a step📣 Download this Month End Checklist over here:👉https://bit.ly/3usDkjQHere’s our checklist:➡️ IMPORT→ here is where we import all relevant transactions & details to our accounting software✔️ Sync transactions from bank to accounting ledger✔️ Sync transactions from credit card to accounting ledger✔️ Import remaining transactions via CSV import✔️ Upload check details✔️ Collect all bills from vendors✔️ Collect all invoices from sales team✔️ Collect employee expense reimbursem*nt claims✔️ Collect receipts for transactions above $1,000➡️ CLASSIFY → now it’s time to classify all transactions with the relevant details✔️ Classify transactions by category✔️ Upload receipts for transactions above $1,000✔️ Classify transactions by class✔️ Enter notes & memos on transactions➡️ RECONCILE → here we confirm that the information we have matches to our other data sources✔️ Download Bank statements & save to directory✔️ Download Credit Card statements & save to directory✔️ Complete bank reconciliations✔️ Record Bank vs ledger differences✔️ Import & reconcile activity into workpapers➡️ CALCULATE & BOOK → now we get to our adjusting journal entries..the heart and soul of a month end close!✔️ Calculate Prepaid expenses✔️ Calculate Accrued Expenses✔️ Calculate Depreciation✔️ Calculate Intercompany Accounts✔️ Calculate Accrued Interest✔️ Calculate Amortization✔️ Calculate Deferred Revenue✔️ Calculate Security Deposits➡️ REVIEW → once we’ve entered in all of the information above, it’s time to zoom out and confirm that all looks good. This is what separates the senior hires from the junior hiresMake it tidy✔️ Review parent accounts and reclass to child accounts where necessary✔️ Review new accounts and consolidate into existing accounts where necessaryIdentify anomalies✔️ Review prior month profit & loss against this month✔️ Review prior month balance sheet against this month✔️Review prior month cash flows against this monthMeasure performance✔️ Compare Profit & Loss against budget✔️ Compare Cash flows against budget➡️ PRESENT → Congrats! You made it this far. Now it’s time to present your findings✔️ Import summary into slide deck✔️ Edit slide deck for pretty design✔️ Update commentary with meaningful insights✔️ Prepare calls to action✔️ Meet with CEO & Management✔️ Present to Board of Directors✔️ Present for fundraiseThat’s our checklist for month end - what’s yours?Let us know in the comments belowPS: Looking for help in closing your books each month?We can help you with that, and so much more.Learn more over here:https://bit.ly/47dbyWR

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Learn about Inventory & Accounting➡️ What it means → goods that will be converted into finished products to be sold to consumers➡️ Where it shows up → on the current assets section of the balance sheet➡️ Valuation methods → these methods show you how you can value your inventory as it converts to COGS1️⃣ FIFO - First In First OutTreats the cost of the inventory sold based off of the price of the oldest inventory purchased2️⃣ LIFO - Last In First OutTreats the cost of inventory sold based off of the price of the most recent inventory purchases3️⃣ Avg costTreats the cost of inventory based off of the average price of all inventory purchases4️⃣ Specific identificationTreats the cost of inventory sold based off of the exact cost used when purchasing➡️ Inventory components - inventory is often classified via one of these 3 buckets1️⃣ Raw materials - goods purchased that will eventually be assembled into finished goods2️⃣ Work in process - goods that have begun assembly but not yet completed as a finished good3️⃣ Finished goods - goods assembled and ready to sell to consumers➡️FormulaBeginning inventorynew purchasesCOGS= ending inventory➡️ Journal entries1️⃣ When purchasing inventory → DR Inventory, CR cash2️⃣ When converting inventory to COGS → DR cost of goods sold, CR finished goods➡️ Related accounts▪️ Cost of goods sold - the costs to deliver your product or service▪️ Freight in/ inbound freight - the shipping costs associated with receiving your inventory▪️ Freight out / outbound freight - the shipping costs associated with shipping your inventory to the customer▪️ Inventory spoilage - the cost of inventory that has been damaged or destroyed and cannot be sold to customers▪️ FOB shipping point - buyer takes ownership and responsibility for the goods at the point of shipment▪️ FOB destination - seller retains ownership and responsibility for the goods until they reach the buyer▪️ Goods on consignment - Ownership remains with the seller until the buyer sells or uses the goods.➡️ Benefits👍 Easier to protect via a patent👍 Can be used as collateral on a loan👍 Variety of sales channels: ecommerce, physical stores, retail, wholesale➡️ Challenges😕 Can be difficult to reconcile😕Can lead to spoilage😕Can lead to working capital constraints😕Margins can be lowThat’s our take on inventory - what would you add?Let us know in the comments below 👇PS: Looking for help with your inventory or company’s accounting?We can help you with that, and so much more.Learn more over here: https://bit.ly/47dbyWR

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The Financial Metrics One PagerIn the encyclopedia of finance & accounting…this one page will help you understand close to every metric that exists, and how / when to use itLet’s dive into each:➡️ BALANCE SHEET RATIOSThese to us are the most useful metrics…as they give CONEXTProfitability is nice…Cash flows is even nicer…but when analyzed in a vacuum, they prevent you from seeing the FULL PICTUREOur favorite metrics here are:- Return on Equity → Net Income / Shareholder Equity- Net Working Capital ratio → (current assets - current liabilities) / Total Assets- Cash Turnover → Sales / Avg Cash & Cash equivalents➡️ CASH RATIOSCash is…and always will be…KING (or queen)👑It’s the fuel to your business…You can be generating the most amazing profits…but if you don’t generate enough cash to sustain your operations...you’ll go out of business.There are so many useful metrics to analyze here…Our favorite are:- Cash Burn → Cash from Operating Activities + Cash from Investing Activities- Free Cash Flows → Operating Cash Flows + Capital Expenditures- Cash Conversion Cycle → Days Sales Outstanding + Days Inventory Outstanding - Days Payable outstanding➡️ PROFITABILITY RATIOSProfitability to us is the heart and soul of any good business model…Why?Because it dictates how much in eventual cash you’ll be able to pull out of your business.Even if your business generated strong cash flows…it will eventually reverse itself if you have negative profits.Your profits are like the starting point for which everything else will flowMy favorite metrics here are:- Gross Margin → Gross Profit / Revenue- Net Income → Your bottom line profit or loss- EBITDA → Net Income + Interest Expense - Interest Income + Taxes + Depreciation + AmortizationOK… we lied. EBITDA is not one of our favorite profitability metrics 🤥We find it incredibly overhyped and misleading…but everyone obsesses over this word..so there!EBITDA, EBITDA, EBITDA 🙌➡️ SAAS METRICSSaaS Business are my favoriteWhere else do you find margins in the 90%+ range?Where else do you get to deliver so much value, all through prebuilt software?It’s no wonder SaaS startups get the highest valuationsHere are our favorite SaaS Metrics:- Annual Recurring Revenue → Opening ARR + New ARR - Churn ARR + Expansion ARR - Contraction ARR- Net Dollar Retention → Net Revenue / Opening MRR (or ARR)- Average Revenue per User → Total Revenue / # of UsersThose are our favorite metrics for analyzing and managing a business…There are so many more included on this one pager.Got any metrics to add?Let us know in the comments belowLooking to review your Financial metrics with us?Simply go to our website and book a demo with us https://bit.ly/48YXBxl

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Download our free template tab for your financial model👇Check the download link at the bottomOne of our favorite things to do in our financial models is to create a template tab.This gives us a strong starting point anytime we need to add a new tab to our models.Instead of starting from scratch, we have a bunch of stuff all ready to go.Why You Need a Template TabEvery Financial model is different…containing unique information about your business model.But at the same time… there’s a lot of similarity.For example…every financial model should have a headcount build.And just like there are similarities from one financial model to another…there are also similarities across each of your tabs.Having a template tab is a great way to include uniformity in all of your tabs, and utilize a bunch of prebuilt assets that you’ll want to reuse across multiple tabs.What to Include in a Template Tab.First… we like to always include a proper header at the top of each tab.This header should show:- Your company name- The name of the tab- An error check status (IE, whether there are any errors in the model)We also like to include a few lines with different formatting, showcasing either a header row, or a subheader row.We are also big fans of aggregating all of our monthly values into Annual and Quarterly columns as well.The idea is that all of our inputs will original in our monthly section, while the Annual & Quarterly section will either sum, or index these values:Lastly, we usually will include some form of a waterfall table on my excel tabs.As a refresher, waterfall tables make it really easy for you to allocate certain values, such as creating a **deferred revenue amortization** scheduleGot anything to add?Let us know in the comments below.Thank you for reading till the end. Kindly find the download link belowhttps://lnkd.in/gkk2uWGu

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