Tag: small business finances

Most important accounting records for a small business in Canada

As a Canadian entrepreneur, you must keep accurate financial records of all activities for your company for six years. Along with your financial statements (balance sheet, income statement, and cash flow forecast), you’re required to keep records for all the individual accounts that make up those statements.

What accounting records do I need to keep?

In Canada, the major accounting records that you must accurately keep are:

  • Accounts Receivable: Who owes you, how much do they owe, and for how long have they owed you?
  • Accounts Payable: Who do you owe, how much and for how long?
  • Inventory: How much did you buy; when did you buy; and how much did you pay? How you account for your inventory will affect your cost of goods sold.
  • Payroll: Total salaries paid to employees, payroll taxes and deductions.
  • GST/HST and Provincial Sales Tax: All businesses with an income greater than $30,000 per year are required to collect and submit on behalf of the federal government a goods and services tax (GST) and, depending where your business operates, provincial sales tax (PST) or harmonized sales tax (HST).
  • Cash: Cash inflows and outflows should be recorded to maintain proper control of cash.
  • Fixed Assets: What you bought, how much you paid, and when you bought, along with depreciation amounts.
  • Other Records: Such as insurance, leases, investments.

There’s lots of accounting software that’s easy to set up and use. You can ask your accountant for their advice on which program would be best for you and your business.

Keep in mind that, while software can be useful, outside accounting advice is important to small business success. Accountants see loads of businesses in different industries and can help you understand and manage the financial health of your company. They also remove some of your own stress and worry about overlooking important financial details. Win-win!

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How to figure out your small business’ start-up costs

value proposition

As an entrepreneur getting ready to launch your business, you’ll need to get a good handle on your start-up costs.

Start-up costs are the one-time expenses you need to incur before you make your first sale. Start-up expenses are one-time capital (big money) expenses and monthly operating expenses. One-time capital costs might include purchase of initial inventory, purchase of equipment or furniture, improvements to your physical space, development of a website and deposits and fees.

How can you determine start-up costs?

The estimate of your start-up monthly operating expense depends on your guess of how long you’ll be operating your business without any money coming in the door. This is known as “Months to First Sale.” On average, it takes about six months to plan and start a small business, but it really depends on your industry. Also, start-up costs for a home-based service business are usually substantially less than a manufacturing business, for example.

What’s the best way to find out how long your Months to First Sale will be? In our opinion, it’s to ask a member of your industry, or someone who operates a business like yours.

How you decide to pay will influence your one-time start-up expenses. For example, if you need a $30,000 delivery van, you can buy it, which means you’ll need $30,000 in cash. You can also lease the van, which means borrowing money to pay for the vehicle and, therefore, a smaller initial amount of cash for the deposit or loan down payment. This lets you pay over time when your cash flow is likely to be stronger. However, you’ll always end up paying more in total because of interest expenses and built-in fees associated with leasing. Carefully consider your start-up needs!

Here’s an example estimate of a small flower shop’s monthly operating and one-time start-up costs:

Monthly operating costs: Monthly Months to first sale Estimated cost
Salary for the owners $5,000 3 $15,000
Rent $6,250 4 $25,000
Advertising $1,000 1 $1,000
Supplies (wire, ribbon, vases) $2,000 1 $2,000
Telephone/internet $100 2 $200
Insurance $550 4 $2,200
Utilities $300 4 $1,200
Miscellaneous $2,000 1 $2,000
TOTAL $48,600

Want to learn more about start-up expenses? Check out our 100 Essential Small Business SkillsTM program!

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Understanding cash flow in a small business

Why is it important to understand flows of cash as they move through your small business? Even if you don’t think you have a head for numbers, not keeping an eye on your cash needs is one of the quickest routes to business failure. Here are some key things for every small business owner to keep in mind about cash flow.

The difference between sales and cash

When you sell a product or service to a customer, you are entering into an exchange with that customer. The customer pays you or your business for this exchange — a sale has been made.

However, in any business transaction there can be a timing issue. You may not get payment for your product or service right away. This creates a cash crisis, when a business is caught without sufficient cash in the bank to pay bills, salaries, loan payments, and other important things. So even though you’ve made a sale, it doesn’t necessarily mean you have cash.

For example, you might have an outstanding invoice in your consulting business, and the client keeps promising you the cheque is in the mail. What if one day overdue becomes three weeks overdue? Can you pay yourself this month? Can you pay your employee salaries? (PS There are industry statistics from Statistics Canada and Dun and Bradstreet that tell you the average time it takes in your industry for customers to pay you.)

In the other direction, your business might owe another business, like a supplier, for inventory.

Both accounts receivable and accounts payable will impact your cash flow planning.

What is cash flow?

As it sounds, the flow of cash through the business during a period of time. Cash is your most important resource and you must keep a close eye on it, particularly during the start-up stage. Conducting a cash flow analysis is an important step in determining the overall feasibility of your business idea. The examples we gave above illustrate the importance of timing cash flows — proper cash management would enable you to have reserves to cover cash shortfalls.

Did we mention the average time to profitability for Canadian businesses is between three and four years? Yup. Three and half years is the average length of time it takes to establish a business, and for that business to have enough sales to cover its expenses. Yikes.

Want to learn more? Check out GoForth Institute’s online small business training.

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break even analysis

What is the break-even point?

The break-even point is a critical number for every small business. Yet, many Canadian entrepreneurs don’t know the point at which sales will translate into profit. Let’s break down the break-even analysis and help you easily understand how it’s calculated.

Why is break-even important?

The break-even point is critical for entrepreneurs, because any money coming in over and above this number is profit! As well, knowing the break-even point can help an entrepreneur determine how much of an increase in sales is required to cover an increase in costs, and may be used when deciding whether to launch a new product.

How to calculate the break-even point

Break-even can be calculated using this formula:

Total Fixed Costs ÷ (Unit Price – Unit Variable Cost)

                                  (also known as contribution margin per unit)

To use this formula, the price of the product or service, per unit, should be known. Entrepreneurs will also need to know the variable cost, per unit, of the product. For example, variable costs for a shoe manufacturer could be the cost of the materials in each pair like leather, laces as well as that portion of labour that it takes to build each pair.

Next, subtract the variable cost per unit from the selling price per unit, to get the bottom part of the formula — the contribution margin per unit.

The top portion of the formula is total fixed operating expenses, things like a business’ rent, salaries not associated with manufacturing, utilities and so on.

For example, let’s say the selling price of an average bouquet at Jill and Lauren’s flower shop is $25. The variable cost of a bouquet, including materials and labour wages, is $5.00 per bouquet.

To figure out the contribution margin per unit, they subtract the variable cost per unit from the sales price. So, $25.00 – $5.00 = $20.00.

Let’s say the fixed costs of Jill and Lauren’s flower shop amount to $10,000. Now that they have all of our numbers, they can plug them into the formula to determine the break-even point, or the number of bouquets they’ll need to sell to cover their costs.

     $10,000                  =                      $10,000          =          500 bouquets
($25.00 – $5.00)                                      $20

Other analyses can be conducted with this knowledge. For example, product-focused businesses can take that number and divide it by the number of days they work per year to figure out how much they’ll need to sell each day to break even.

The break-even point in sales dollars can be determined by multiplying the break-even point in units by the selling price. This will give the entrepreneur the point where total sales equals total costs, in dollars.

For more insight into the break-even point and more, check out our online small business training – comprehensive but designed to fit around your busy schedule!

 

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